Bank runs and infectious diseases

Relationships matter in economics. And this interesting new research from Duke University has found strong links between social networks and the speed with which a run on a bank such as Northern Rock can happen and the longer term consequences for the bank if it is able to survive the crisis. A collapse in depositor confidence can spread remarkably quickly and there are some important parallels with the dispersion of infectious diseases such as swine flu. After a week on tamiflu and living in a close-knit community struck with numerous cases of swine flu, it is interesting to observe how effective (or otherwise) protective measures can be in limiting the impact of the spread of flu.

Back to the Duke research - they find in their analysis of bank runs that

1/ Having a system of deposit insurance for savers does matter
2/ Depositors who have a long, deep and frequent contact relationship with a bank are less likely panic and withdraw their money
3/ Depositors who run rarely come back to the bank in the long run and this has serious consequences for banks that need to recapitalise to secure their longer term future