Bank Runs: Theories and Policy Applications

In the present paper, I review the foundations of bank runs, and of the incentives of the economic agents to join them, as a base for discussing possible regulatory interventions to alleviate their effects. To this end, I study both self-fulfilling as well as fundamental runs, and propose a reconciliation of the two approaches, via the introduction of "global games". My policy conclusions highlight the role of competition and liquidity requirements to tame self-fulfilling runs. Moreover, market incompleteness and the increasing complexity of modern financial systems justify the imposition of liquidity requirements, in the presence of systemic aggregate liquidity risk.