Deposit Insurance and Orderly Liquidation without Commitment: Can we Sleep Well?
NBER Working Paper No. 19132
This paper studies the provision of deposit insurance along with liquidation decisions without commitment in an economy with heterogenous households. The analysis considers both the control of the balance sheet of a failing bank and the ex post provision of deposit insurance. Redistribution plays a key role in these decisions. When households are identical, deposit insurance will be provided ex post to reap insurance gains. But deposit insurance will not be provided ex post if it requires a (socially) undesirable redistribution of consumption which outweighs insurance gains. Partial deposit insurance may though have value. Heterogeneity across households also impacts the optimal liquidation decision.
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