Optimal Deposit Insurance
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.
Eduardo Dávila & Itay Goldstein, 2023. "Optimal Deposit Insurance," Journal of Political Economy, vol 131(7), pages 1676-1730.