Professor V.V.
Chari
(Primary
Advisor)
chari@res.mpls.frb.fed.us
Department of Economics
University of Minnesota
4-101 Hanson Hall
Minneapolis, MN 55455
(612)
204-5518
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Chunyang (Justin) Wang
Ph.D.
Candidate
Department
of Economics
University of Minnesota
Research Interests
Macroeconomics
Finance
Money and Banking
Applied Econometrics
Contact
Information
4-101
Hanson Hall
1925 4th Street South
Minneapolis, MN 55455
Mobile: (651) 307-8022
wangx891@umn.edu
designed by SaySomethinDesign.com
Bailouts
and Bank runs: Theory and Evidence from TARP
(Job Market Paper) [Download]
ABSTRACT: There
were
widespread bank runs and government bailouts during the 2008 Financial
Crisis. Immediately
following the announcement of various bailout policies intended to
prevent
banking panics, bank run probabilities for some banks, as measured by
various
bank run indices (see Veronesi and Zingales (2010) for example), rose
dramatically. An extreme example is the run on Northern Rock right
after its
bailout announcement. This paper develops a model of information based
bank
runs to analyze how the announcement of bailouts affects investors'
bank run
incentives. I consider an environment where the quality of a bank's
asset is
random, and both the government and investors obtain private signals of
the
asset quality after its realization. The government bails out the bank
in the
form of capital injection only if it perceives the bank is bad. The
equilibrium
probability of bank runs is uniquely determined. I conclude that before
the
announcement, the existence of such bailout policy reduces investors'
bank run
incentives, but after the announcement, investors may run on the bank,
since
such an announcement reflects the government's information about the
bad bank
asset. The announcement of bailouts will be more likely to trigger bank
runs if
the bailout amount is smaller, the government is better informed, or
the
government specifies the bank is worse. I conduct event studies in
which I use
the stock price abnormal return as a proxy for the probability of a
bank run.
Consistent with my theory, I find that, the recipient unspecified
announcement
of TARP generated positive abnormal returns, but after the specified
bailout
announcements, banks displayed significant negative abnormal returns
and the
abnormal return was positively correlated with the bailout ratio.
REFERENCES
Professor Larry
Jones
lej@umn.edu
Department of Economics
University of Minnesota
4-101 Hanson Hall
Minneapolis, MN 55455
(612)
624-4553
Professor
Andrew Winton
winto003@umn.edu
Finance Department
University of Minnesota
321-19th Avenue South
Minneapolis, MN 55455
(612)
624-0589