Research On Bank Run Risks In Developing Countries

Under the guidance of financial liberalization theories created by McKinnon and Shaw, many developing countries move towards opening their financial systems since 1970s. With the capital flow liberalization, the financial crisis broke out among these developing economies after a quite short period of economic boom. Particularly in Latin America and Asia, the bank run crisis brought these nations tremendous losses. At the center of these crisis is the interactions between international capital flows and financial intermediaries. In particular, short-term capital flows have been pointed out to be one of the most crucial factors in causing financial disasters among developing economies. This has renewed a new round of discussion on the costs and benefits of capital flows restriction.Built on expanded Diamond-Dybvig Model, the thesis firstly examines the effects that capital inflows have on domestic banks, and thus depositors, under the context of a short-term capital inflows. We then consider policy and strategy analysis in an opening banking environment where both fundamental runs (macroeconomic variables cause bank runs) and sunspot runs (where self-fulfilling expectations generate agents panic and bank runs) are possible. Under this environment, policies of narrow banking and suspension of convertibility will not be the optimal ones. In contrast, a lender of last resort mechanism, where central banks lend currency to banks in the event of bank run risks, achieves the optimal outcome by preventing risky liquidation of investments and distributing risk when there are runs as well.By using data relevant to financial crisis among developing nations in the past 20 years, the thesis also employs a multinomial Logit model that differentiates both types of runs to study the factors that are associated with the emergence of financial crisis. Through Empirical Test, we find policies should vary according to different types of bank runs and hereby make constructive suggestions for the prevention and control of bank risk in China.