Too Big to Fail, Too Small to Survive

Abstract

This paper identifies a novel bank-run externality: when depositors can shift funds across risky banks in a crisis, a large national bank perceived as safer may disproportionately raise the likelihood of runs among smaller regional banks. A minor shock can prompt a cascading chain reaction of deposit withdrawals among many regional banks, generating systemic vulnerabilities beyond traditional interbank-contagion channels. We extend global game models by allowing realistic deposit mobility across multiple risky banks, alongside the conventional risk-free option. Our framework captures the interaction between strategic complementarity in run/stay decisions among multiple substitutes—a dynamic that remains underexplored in the literature.