Karolin Kirschenmann (ZEW) - Crisis? What Crisis? Bank Stability, Financial Development and Propaganda

BOFIT seminars

BOFIT Seminar - Karolin Kirschenmann (ZEW) - Crisis? What Crisis? Bank Stability, Financial Development and Propaganda

Co-authors: Ruben Enikolopov (New Economic School and Universitat Pompeu Fabra), Koen Schoors (Ghent University) and Konstantin Sonin (University of Chicago)

Abstract
We study the interaction between bank depositors and a government. Will the government feed depositors biased news about the state of the banking sector in the hope to avert a bank run? Our Bayesian persuasion model shows that it may be optimal for the government to bias the signal depositors receive even if all agents are rational and have common priors. The model predicts that depositors with a biased signal are less likely to run on their bank but also less likely to deposit their money with the banking system in the first place. We show empirically that countries with more media freedom, i.e. less bias, experience both more banking crises and higher financial development, in line with the theory. We pin down the underlying mechanism with a case study from Russia. In the August 1998 crisis, banks in areas with more access to the independent TV channel NTV saw their deposits return much more strongly in the aftermath of the crisis, in line with the reasoning that the crisis revealed differences in media bias across TV channels and induced differences in financial development at the bank level.

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