Working Paper: NBER ID: w15072
Authors: Harald Uhlig
Abstract: The 2008 financial crisis is reminiscent of a bank run, but not quite. In particular, it is financial institutions withdrawing deposits from some core financial institutions, rather than depositors running on their local bank. These core financial institutions have invested the funds in asset-backed securities rather than committed to long-term projects. These securities can potentially be sold to a large pool of outside investors. The question arises, why these investors require steep discounts to do so. I therefore set out to provide a model of a systemic bank run delivering six stylized key features of this crisis. I consider two different motives for outside investors and their interaction with banks trading asset-backed securities: uncertainty aversion versus adverse selection. I shall argue that the version with uncertainty averse investors is more consistent with the stylized facts than the adverse selection perspective: in the former, the crisis deepens, the larger the market share of distressed core banks, while a run becomes less likely instead as a result in the adverse selection version.\n\nI conclude from that that the variant with uncertainty averse investors is more suitable to analyze policy implications. This paper therefore provides a model, in which the outright purchase of troubled assets by the government at prices above current market prices may both alleviate the financial crises as well as provide tax payers with returns above those for safe securities.
Keywords: No keywords provided
JEL Codes: E44; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market share of distressed banks (G21) | likelihood of systemic bank run (E44) |
| increased liquidity demands due to early withdrawals (J26) | increased opportunity costs for banks (G21) |
| increased opportunity costs for banks (G21) | likelihood of systemic bank run (E44) |
| market share of distressed banks (G21) | increased liquidity demands due to early withdrawals (J26) |
| larger pool of troubled institutions (G28) | likelihood of bank run (E44) |