An Experimental Exploration of Self-Fulfilling Banking Panics: Their Occurrence, Persistence, and Prevention

This article tests the possibility and the degree of persistence of self-fulfilling banking panics through an experimental protocol. Panics are proved to be persistent phenomena that are difficult to prevent. However, it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability, combined with a "narrow-banking" solution, which makes banks more liquid. Additionally, panic prevention requires a full deposit coverage to be effective. This suggests that the moral-hazard issue should not be tackled through a lower deposit coverage, especially in emerging countries' banking systems where depositors are likely to lose confidence.