The Welfare Costs of Self‐Fulfilling Bank Runs

We study the welfare implications of self-fulfilling bank runs and liquidity requirements, in a growth model where banks, facing persistent possible runs, can choose in any period a run-proof asset portfolio. In this framework, runs distort banks’ insurance provision against idiosyncratic shocks, and liquidity requirements resolve this distortion at the cost of a credit tightening. Quantitatively, the welfare costs of self-fulfilling bank runs are equivalent to a constant consumption loss of up to 2.3% of U.S. GDP. Liquidity requirements might increase these welfare costs by up to 2.4%.