Banks should offer ‘equal service’ when facing a run, research finds
Research is based on the experience of the US economy
When a bank is facing a run, the institution should be allowed to offer "equal service" over "sequential service", since this measure "seems to have a beneficial effect on the economy", according to a working paper published by the Bank of Portugal.
The authors of the paper A dynamic quantitative macroeconomic model of bank runs, Elena Mattana and Ettore Panetti, find that a model that allows all depositors who participate in the run to receive the same share of the available resources brings a "faster recovery" to the economy and "lower inter-temporal welfare costs", even though it generates a "larger drop in GDP on impact".
Taking the US economy as a model, the paper defines that in equilibrium, "a shock to the probability of a bank run leads to a drop in GDP of between 0.001 and 5.6 percentage points".
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