Deposit Insurance, Deposit Competition, and Bank Instability

The lack of full deposit insurance coverage might lead to additional financial instability during crises if uninsured depositors move funds to more secure institutions. Because the broad coverage of modern systems makes this dynamic hard to test, we study the role that the U.S. Postal Savings System, which provided insured accounts at some post offices, played in the Great Depression. Postal savings was associated with increased depositor withdrawals at banks in the same town. Using an IV that identifies exogenous variation in postal saving, we find that banks were more likely to close when a nearby post office accepted deposits.