"The Social Determinants of Bank Runs"

Abstract

Motivated by the 2023 U.S. regional bank crisis, I develop a theory of how depositors’ social structure determines a bank's vulnerability to a run. Rumors about solvency spread through interpersonal communication, triggering withdrawals. The rumor may be false: a sound bank absorbs any outflow, whereas a truly fragile one crashes once withdrawals exceed a threshold. Depositors who observe no crash gradually infer the bank is sound and return their deposits. Whether a run occurs at all is a race between the spread of withdrawals and the return of reassured depositors. When depositors are dispersed, communication is slow enough that returns overtake withdrawals before they breach capacity, and the bank escapes a run even when the rumor is true. Among banks that do run, a more connected depositor base makes the run faster and more severe.