Working Paper: NBER ID: w29753
Authors: Kristian Blickle; Markus K. Brunnermeier; Stephan Luck
Abstract: We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance. We find that deposits decline by around 20% during the run and that there is an equal outflow of retail and non-financial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks. In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but continues to function for surviving banks, which can borrow from other banks in response to deposit outflows. Since regular depositors appear uninformed, we argue that it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.
Keywords: No keywords provided
JEL Codes: G20; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of information among retail depositors (G21) | indiscriminate withdrawals (D14) |
| interbank depositors (G21) | high degree of precision in identifying failing banks (G21) |
| failing banks lose access to interbank market (G21) | banks are well-informed about banking system's state (G21) |
| banks experiencing deposit inflows (G21) | do not hoard liquid funds (G33) |
| interbank depositors (G21) | provide discipline through short-term funding (Y80) |
| time deposits are withdrawn (E43) | demand deposits remain stable (E41) |
| differential response of depositors (G21) | varying levels of information among them (D83) |