Liquidity regulation, banking history and financial fragility: An experimental examination

We report an experiment conducted to evaluate interactions between liquidity requirements and depositors’ experiences with the banking system. Treatments consist of combinations of required liquidity levels and ‘weak’ or ‘strong’ background conditions, intended to induce stable histories of play (with few bank runs), or unstable histories of play (where bank runs are common). Experimental results suggest that both increased liquidity levels and a stable history of play improve the incidence of coordination on the Pareto-preferred no-run outcome. Nevertheless, even with an unstable history, non-degenerate no-run outcomes occur quite reliably with high liquidity requirements.