Asset-Side Bank Runs and Liquidity Rationing: A Vicious Cycle

Abstract

I analyze runs on credit lines in an infinite-horizon banking model, focusing on the strategic complementarity between bankers and credit line borrowers. Panic drawdowns by borrowers coupled with bank liquidity rationing can mutually reinforce each other, creating a vicious cycle. Using data from U.S. banks, I estimate the model and quantify the amplification effect arising from strategic complementarity. This amplification effect accounted for two-thirds of the contraction of bank credit during the 2008–2009 crisis. Moreover, I show that policies targeting borrowers have a crowding-in effect and can effectively contain credit contraction. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00872 .