Bank-Runs, Contagion and Cedit Easing

We present a macroeconomic model of financial crises in which banks are subject to self-fulfilling runs. An individual bank is vulnerable to a run when a loss of investors’ confidence triggers deposit withdrawals and leads the bank to default on its obligations. We characterize how this vulnerability depends on its own leverage as well as macroeconomic fundamentals. We show that bank-runs can be contagious and spread out across the entire financial system. A key policy insight is that the effectiveness of credit easing depends critically on whether a financial crisis is driven by fundamentals or loss of confidence.