“Managing Bank Run Risk: The Perils of Discretion” by Zongbo Huang
Joint Economics and Finance Seminar
The Chinese University of Hong Kong, Shenzhen
This article studies the role of banks’ discretion in managing panics in a dynamic
model of credit line run. In downturns banks tighten liquidity by cutting credit lines.
Anticipating this, borrowers run to draw down credit lines in the first place, which
imposes further pressure on banks. Thus liquidity rationing and credit line runs form
a feedback loop that amplifies bank distress. I fit the model to the U.S. commercial
bank data and find that the feedback effects contribute to more than a half of the
liquidity contraction in downturns. From a normative perspective, a commitment tax
on bank cutting credit lines is effective in mitigating runs.