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Deposit and Credit Reallocation in a Banking Panic: The Role of State-Owned Banks

Macro & Public Finance

Deposit and Credit Reallocation in a Banking Panic: The Role of State-Owned Banks

by Dr. Prachi Mishra, Abhiman Das, Viral V. Acharya, Nirupama Kulkarni, Nagpurnanand R. Prabhala

We study a bank run in India in which private bank branches experience sudden and considerable loss of deposits, which migrate to state-owned public sector banks (PSBs) that serve as safe havens. We trace the consequences of the deposit reallocation using bank branch-level balance sheet and firm-bank lending data. The flight to safety is not a flight to quality. Lending shrinks and credit quality improves in run banks, but worsens in PSBs receiving the flight-to-safety flows. The reallocation of resources is not efficient in the aggregate.

18 February, 2025

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