Contagious Bank Runs and Committed Liquidity Support

In a crisis, regulators and private investors can find it difficult, if not impossible, to tell whether banks facing runs are insolvent or merely illiquid. We introduce such an information constraint into global-games-based bank run model with multiple aggregate uncertainties. The creates vicious cycle between contagious falling asset prices limits the effectiveness of traditional emergency liquidity assistance programs. explain how regulator set up committed support contain contagion stabilize even without on banks’ solvency, rationalizing some recent developments in policy practices. This paper was accepted by Agostino Capponi, finance. Funding: work supported National Natural Science Foundation China [Project 71803024]. Z. Li also acknowledges financial from “Innovation Talent Base for Digital Technology Finance” B21038]. Supplemental Material: online appendix is available at https://doi.org/10.1287/mnsc.2021.4258 .