Project description
A closer look at deregulation processes and bank runs
Banking crises often lead to economic declines and are usually triggered by depositor runs following deregulation. The 2023 US turmoil led to the failure of three mid-sized banks. The ERC-funded INFINITY project aims to enhance our understanding of bank runs, deregulation processes, and the effectiveness of supervisory measures. It will develop a framework to explore why banks offer demandable debt despite the associated risks. The project will provide insights into the role of capital in financial stability and the transmission of monetary policy. Additionally, it will study how banks influence regulation, particularly under the Economic Growth, Regulatory Relief, and Consumer Protection Act, and evaluate the impact of supervisory oversight on financial stability.
Objective
Banking crises are recurrent phenomena. They lead to large declines in economic activity and share two features: i) they are often
triggered by runs, i.e. sudden withdrawals by depositors; and ii) they follow episodes of deregulation and/or lax supervision.
The 2023 banking turmoil in the U.S. is no exception. After the relaxation of prudential rules in 2018, three midsized banks faced
distress as a result of runs, leading to three of the largest failures in history. Motivated by these events, the proposal seeks to enhance
our understanding of the occurrence of runs, the process leading to deregulation and the effectiveness of supervision. It is organized
in three projects, one theoretical [T] and two empirical [E].
1) Runs in modern banking [T]. The project builds a new framework to study why banks offer demandable debt, even if it creates run
risk. Based on some stylized facts, it departs from the standard assumptions of competitive deposit market, risk averse investors and
fully leveraged banks. The results will advance our knowledge on the role of capital for financial fragility, monetary policy
transmission and central bank credibility.
2) The political economy of banking deregulation [E]. The link between crises and deregulation prompts the question of whether
banks influence regulation. The project studies this issue in the context of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA). Its goal is to better understand banks’ influence on politicians and the channels through which this
influence is exerted.
3) Supervision with style: The impact of supervisors on bank behavior [E]. An important question is the extent to which the
implementation of banking regulation through supervisory oversight has a role per se in fostering financial stability. Exploiting a
unique and novel dataset, the project investigates whether and how supervisory intensity and individual supervisors’ characteristics
matter for the effectiveness of supervision.
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Project’s keywords as indicated by the project coordinator. Not to be confused with the EuroSciVoc taxonomy (Fields of science)
Programme(s)
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
Multi-annual funding programmes that define the EU’s priorities for research and innovation.
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HORIZON.1.1 - European Research Council (ERC)
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Topic(s)
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Calls for proposals are divided into topics. A topic defines a specific subject or area for which applicants can submit proposals. The description of a topic comprises its specific scope and the expected impact of the funded project.
Funding Scheme
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Funding scheme (or “Type of Action”) inside a programme with common features. It specifies: the scope of what is funded; the reimbursement rate; specific evaluation criteria to qualify for funding; and the use of simplified forms of costs like lump sums.
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Call for proposal
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Procedure for inviting applicants to submit project proposals, with the aim of receiving EU funding.
(opens in new window) ERC-2024-ADG
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Net EU financial contribution. The sum of money that the participant receives, deducted by the EU contribution to its linked third party. It considers the distribution of the EU financial contribution between direct beneficiaries of the project and other types of participants, like third-party participants.
20136 Milano
Italy
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