Working Paper: CEPR ID: DP17996
Authors: Linda Schilling
Abstract: Policy makers have developed different forms of policy intervention for stopping, or preventing runs on financial firms. This paper provides a general framework to characterize the types of policy intervention that indeed lower the run-propensity of investors versus those that cause adverse investor behavior, which increases the run-propensity. I employ a general global game to analyze and compare a large set of regulatory policies. I show that common policies such as bailouts, Emergency Liquidity Assistance, and withdrawal fees either exhibit features that lower firm stability ex ante, or have offsetting features rendering the policy ineffective.
Keywords: bank runs; global games; policy effectiveness; bank resolution; withdrawal fees; emergency liquidity assistance; lender of last resort policies; money market mutual fund gates; suspension of convertibility
JEL Codes: G28; G21; G33; D8; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory interventions (G18) | run propensity (C25) |
| bailouts (H81) | adverse investor behavior (G41) |
| emergency liquidity assistance (F35) | adverse investor behavior (G41) |
| adverse investor behavior (G41) | run propensity (C25) |
| smooth regulatory interventions (G18) | firm stability (G32) |
| harsh interventions (D74) | instability (C62) |
| regulatory policies (G18) | investor behavior (G41) |