Bank Runs , Fragility , and Credit Easing

We present a tractable dynamic general equilibrium model of self-fulfilling bank runs , where banks trade capital in competitive and liquid markets but remain vulnerable to runs due to a loss of creditor confidence. We characterize how the vulnerability of an individual bank depends on its leverage position and the economy-wide asset prices. We study the effect of credit easing policies , in the form of asset purchases. When a banking crisis is generated by runs , credit easing can reduce the number of defaulting banks and enhance welfare. When the crisis is driven by fundamentals , credit easing may have adverse consequences. ( JEL E32, E44, E58, G01, G21, G28, G33 )