On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis

Date: 2015-09
By: Douglas D. Davis (Department of Economics, VCU School of Business)
Robert Reilly (Department of Economics, VCU School of Business)
URL: http://d.repec.org/n?u=RePEc:vcu:wpaper:1501&r=net
This paper reports an experiment conducted to evaluate the effects of alterations in the terms of repayments to depositors following a liquidity suspension as well as the effect of alterations in the publicity of information about withdrawal behavior on the fragility of distressed banks. Results indicate that a ÒtoughÓ renegotiation stance, e.g. of protecting depositors who maintain their money in the bank, can quite effectively promote stability. Information provided to depositors regarding past withdrawal behavior weakens the effectiveness of a tough renegotiation policy, but reduces fragility somewhat for a more lenient rescheduling condition.
Keywords: liquidity suspension, observability, bank runs, experimental economics
JEL: G21 C9
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