Runs on Banks and the Lessons of the Great Depression
Withdrawals of deposits from banks, especially large and rapid withdrawals that may place many banks in distress and potentially force their unwarranted closure, are typically seen as economic nightmares. Such phenomena seem to demonstrate the need for government action to remove the incentive for depositors to withdraw from banks (as deposit insurance does) or to help banks avoid the consequences of depositor withdrawals (through assistance from the Fed). Destructive bank runs are blamed either on irrational behavior by depositors or on rational depositor concerns under imperfect information. In the latter case, an information externality underlies market failure.
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- September 12, 2011