Can Macroprudential Policy on Retail Banks Eliminate Bank Runs? Evidence from WAEMU’s Banking Sector

The aim of this paper is to determine a capital ratio for retail banks that can reduce the likelihood of bank runs in the WAEMU area. The study also compares the impact of imposing capital requirements on retail banks versus wholesale banks. The key finding are as follows: A capital ratio of 10 percent for retail banks is found to be sufficient to eliminate the probability of bank runs and mitigate interbank market frictions in the WAEMU area. Similarly, applying the same requirements to wholesale banks also eliminates the likelihood of bank runs. Implementing capital requirements on retail banks does not significantly affect interbank lending costs, whereas imposing the same requirements on wholesale banks leads to an increase in these costs. Consequently, regulating retail banks tends to shift assets towards wholesale banks, while regulating wholesale banks reallocates assets towards retail banks. The calculated capital ratio of 10 percent for retail banks maximizes welfare, surpassing the welfare achieved when the same requirements are imposed on wholesale banks.