Staff Reports
Who Can Tell Which Banks Will Fail?
Number 1005
February 2022

JEL classification: G01, G21, N20, N24

Authors: Kristian S. Blickle, Markus Brunnermeier, and Stephan Luck

We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance. We find that deposits decline by around 20 percent during the run and that there is an equal outflow of retail and nonfinancial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks. In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but continues to function for surviving banks, which can borrow from other banks in response to deposit outflows. Since regular depositors appear uninformed, it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.

Available only in PDF
Author Disclosure Statement(s)
Kristian Blickle
I have nothing to disclose.

Markus Brunnermeier
I have nothing to disclose.

Stephan Luck
I have nothing to disclose.
By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.   Close