Working Paper: NBER ID: w28676
Authors: Eduardo Dvila; Itay Goldstein
Abstract: This paper studies the optimal determination of deposit insurance when bank runs are possible. We show that the welfare impact of changes in the level of deposit insurance coverage can be generally expressed in terms of a small number of sufficient statistics, which include the level of losses in specific scenarios and the probability of bank failure. We characterize the wedges that determine the optimal ex-ante regulation, which map to asset- and liability-side regulation. We demonstrate how to employ our framework in an application to the most recent change in coverage, which took place in 2008.
Keywords: Deposit Insurance; Bank Runs; Financial Regulation
JEL Codes: G01; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| level of deposit insurance coverage (G28) | probability of bank failure (G21) |
| changes in coverage (G52) | social welfare (I38) |
| probability of bank failure (G21) | social welfare (I38) |
| level of deposit insurance coverage (G28) | social welfare (I38) |