Research

Bank Runs and Minimum Reciprocity

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Abstract

This study investigates a behavioral aspect of bank runs that occur as a consequence of depositors’ panic. We assume that each depositor is motivated not only by his/her financial interest but also by reciprocity. Our results show that bank-run equilibria can be eliminated by introducing minimum reciprocity, which affects depositors to the extent that it does not infringe on their financial interests. This permissive result holds even in the absence of suspension of convertibility and restrictions on depositors’ right of withdrawal. To prove this result, we design a priority-based deposit contract and investigate a scenario in which depositors can always observe the bank’s remaining payment capacity. We allow the bank to include a clause in the deposit contract that each depositor has an option to reserve his/her withdrawal. Even in this scenario, we can eliminate any bank-run equilibrium by considering minimum reciprocity.

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