Distinguishing Panics and Information-based Bank Runs: Welfare and Policy Implications

In this paper we contrast panics and information-based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered. The model of information-based runs is characterized by two-sided asymmetric information: the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality. We also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts. We show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns.