Working Paper: NBER ID: w12594
Authors: Chingyi Chung; Gary Richardson
Abstract: Eight states established deposit insurance systems between 1908 and 1917. All abandoned the systems between 1921 and 1930. Scholars debate the costs and benefits of these policy experiments. New data drawn from the archives of the Federal Reserve Board of Governors demonstrate that deposit insurance influenced the composition of bank suspensions in these states. In typical years, suspensions due to runs fell. Suspensions due to mismanagement rose. During the penultimate year of each system, the bank failure rate rose to an unsustainable height and the system ceased operations.
Keywords: deposit insurance; bank suspensions; moral hazard; financial stability
JEL Codes: E42; E65; L1; N1; N14; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deposit insurance (G28) | Reduced incidence of bank suspensions due to runs (E44) |
| Deposit insurance (G28) | Increased suspensions due to mismanagement (H12) |
| Bank suspension rates (G21) | Abandonment of deposit insurance systems (G28) |
| Deposit insurance (G28) | Correlation with suspension rates due to economic conditions (I21) |
| Deposit insurance (G28) | Little impact on overall bank suspension rates during non-crisis years (F65) |