Interdependent bank runs under a collapsing fixed exchange rate regime

This paper provides a framework for simultaneous multiple bank runs in a country experiencing a currency crisis. The correlation of bank runs increases as the proportion of debts from foreign creditors (indexed to the dollar) to domestic creditors (indexed to the domestic currency) increases. Moreover, when the share of dollar debt is sufficiently high, this interlinkage is perfect; that is, runs occur in all banks or not at all. Consequently, a situation exists where even a solvent bank cannot borrow in the interbank market. These findings imply that as the domestic banking sector becomes increasingly dependent on dollar debt, there is a heightened requirement for dollar reserves and a lender-of-last-resort facility.