Working Paper: NBER ID: w19132
Authors: Russell Cooper; Hubert Kempf
Abstract: This paper assess the affects of the orderly liquidation of a failing bank and the ex post provision of deposit insurance on the prospect of bank runs. Assuming that the public institutions in charge of these policies lack commitment power, these interventions, both individually and jointly, are chosen and undertaken ex post. The costs of liquidation and redistribution across heterogenous households play key roles in these decisions. If investment is suffciently illiquid, a credible liquidation policy will deter runs. Deposit insurance will not be provided ex post if it requires a (socially) undesirable redistribution of consumption that outweighs insurance gains. Despite the lack of commitment, runs can be prevented by the provision of deposit insurance funded by an optimally designed ex post tax scheme.
Keywords: Deposit Insurance; Bank Runs; Orderly Liquidation; Public Commitment
JEL Codes: E42; E58; G01; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deposit insurance (G28) | bank runs (E44) |
| liquidation policy (G33) | bank runs (E44) |
| redistribution (H23) | deposit insurance (G28) |
| liquidation policy influences deposit insurance effectiveness (G28) | deposit insurance (G28) |