Open Access Journal Article

Bank Runs and Design Flaws of Deposit Insurance

by Sangkyun Park a, b,* orcid
a
The U.S. Office of Management and Budget, USA
b
Federal Reserve Banks (New York and Saint Louis), USA
*
Author to whom correspondence should be addressed.
EAL  2023, 29; 2(3), 29; https://doi.org/10.58567/eal02030003
Received: 30 April 2023 / Accepted: 16 May 2023 / Published Online: 31 May 2023
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Abstract

Deposit insurance systems are designed to balance the benefits of preventing bank runs and protecting ordinary savers against the costs of reduced market discipline and potential burdens on taxpayers. Design flaws of deposit insurance make the benefits too low and the costs too high. This paper presents an example in which solvent banks can effectively manage runs, depositors discipline banks to a reasonable extent, and taxpayers have a fair deal. It has three key features: the bank’s authority to activate deposit insurance early, a coinsurance scheme that transfer money from those who run on solvent banks to those who stay put, and a shareholder position for taxpayers. Early activation of deposit insurance prevents fire sales of assets and provides opportunities to verify the bank’s solvency. The coinsurance scheme weakens the incentive to run and strengthens the incentive to hold on to their accounts. As shareholders, taxpayers receive dividends in normal times in exchange for large payouts in catastrophic events.

Keywords: Bank runs; deposit insurance; market discipline;
Copyright: © 2023 by Park. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

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ACS Style
Park, S. Bank Runs and Design Flaws of Deposit Insurance. Economic Analysis Letters, 2023, 2, 29. https://doi.org/10.58567/eal02030003
AMA Style
Park S. Bank Runs and Design Flaws of Deposit Insurance. Economic Analysis Letters; 2023, 2(3):29. https://doi.org/10.58567/eal02030003
Chicago/Turabian Style
Park, Sangkyun 2023. "Bank Runs and Design Flaws of Deposit Insurance" Economic Analysis Letters 2, no.3:29. https://doi.org/10.58567/eal02030003
APA style
Park, S. (2023). Bank Runs and Design Flaws of Deposit Insurance. Economic Analysis Letters, 2(3), 29. https://doi.org/10.58567/eal02030003

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References

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