We develop a general equilibrium model of self-fulfilling bank runs in a setting without
aggregate risk. The key novelty is the way in which the banking system’s assets and
liabilities are connected. Banks issue loans to entrepreneurs who sell goods to households,
which in turn pay for the goods by redeeming bank deposits. The return on bank assets
is thus contingent on households being able to withdraw their deposits. In a run, not all
households that wish to consume manage to withdraw, since part of banks’ cash reserves
end up in the hands of households without consumption needs. This lowers revenues of
entrepreneurs, which causes some of them to default on their loans and thereby rationalises
the run in the first place. Interventions that restrict redemptions in a run – such as deposit
freezes – can be self-defeating due to their negative effect on demand in goods markets.
We show how runs may be prevented with combinations of deposit freezes and redemption
penalties as well as with the provision of emergency liquidity by central banks.