NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Deposit Insurance and Orderly Liquidation without Commitment: Can we Sleep Well?

Russell Cooper, Hubert Kempf

NBER Working Paper No. 19132
Issued in June 2013
NBER Program(s):   EFG

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.

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This paper was revised on June 30, 2014

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Document Object Identifier (DOI): 10.3386/w19132

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