States in the arid U.S. West, where average annual precipitation is below 20 inches, have experienced ongoing water scarcity in part due to prolonged spells of drought. Most western states rely on the doctrine of prior appropriation based on the seniority of rights to allocate water across individuals. Over the past two decades, states have established water supply banks and rental pools to facilitate the transfer of water among users on a season-to-season basis, which, in many cases constitutes a hybrid system that marks a movement towards a market-based system of allocating water but retains many of the features of current water rights institutions. The study delineates the importance of these banks in alleviating short term water scarcities when water use may be curtailed based on priority dates. It finds that under severe drought conditions, water banks may approximate the efficiency gains from a fully efficient water allocation scenario but may not prevent the large scale diversions by senior users.