Rapid bank runs and delayed policy responses

Abstract

The 2023 banking turmoil highlighted how technological advancements have significantly accelerated the speed of bank runs. This paper investigates the impact of these faster bank runs on the effectiveness of policy interventions by interpreting them as a constraint on the relative speed of policy responses. Using a model of bank runs and ex-post policy responses, we examine how delays caused by this constraint affect financial fragility and welfare. We find that while delays exacerbate welfare loss by distorting allocations, they may also decrease fragility by making banks more cautious. We study the optimal level of structural delay, balancing the trade-off between distributional distortions and financial fragility. Furthermore, we extend this model to explore the roles of liquidity regulations and capital injections given such a delay. We show that regulation may be more desirable than a capital injection if the delay is substantial because the benefit of decreased fragility is particularly potent.