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Bank Runs, Fragility, and Regulation

Working Paper 804 | Published April 11, 2024

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Manuel Amador Monetary Advisor
Javier Bianchi Monetary Advisor
Bank Runs, Fragility, and Regulation


We examine banking regulation in a macroeconomic model of bank runs. We construct a general equilibrium model where banks may default because of fundamental or self-fulfilling runs. With only fundamental defaults, we show that the competitive equilibrium is constrained efficient. However, when banks are vulnerable to runs, banks’ leverage decisions are not ex-ante optimal: individual banks do not internalize that higher leverage makes other banks more vulnerable. The theory calls for introducing minimum capital requirements, even in the absence of bailouts.