Bank Run Exposure in a Paycheck-to-Paycheck Economy with Loss-Averse Depositors

Abstract

We develop a behavioural model of bank run exposure in a paycheck-to-paycheck economy with loss averse depositors. Income is received through demand deposits, and consumption ratcheting embeds reference dependence in a parsimonious asset-pricing framework. We show that sufficiently high subjective bad-state probabilities endogenously increase liquidity demand and generate equilibrium stress states supporting bank runs. These states define a Bank Run Exposure State Space and yield a martingale representation for exposure dynamics. A proof-of-concept empirical implementation using Call Report data constructs bank-level exposure proxies from funding and lending composition. A regression-weighted composite measure modestly improves fit relative to a retail-share benchmark, with stronger amplification among small banks and during the post-Silicon Valley Bank (SVB) collapse period. The framework highlights how behavioural liquidity demand alters equilibrium reserve holdings and can crowd out productive lending.