Deposit Insurance and Banking Stability

20 Pages Posted: 19 Apr 2013

See all articles by Kam Hon Chu

Kam Hon Chu

Memorial University of Newfoundland - Department of Economics

Date Written: January 19, 2011


This article will examine in a more systematic way the effectiveness of deposit insurance coverage in maintaining banking stability. More specifically, I argue that raising deposit insurance coverage in an attempt to eradicate bank runs is not necessarily the optimal policy because bank runs, though commonly perceived as instability when they take place, have their positive role to play in reinforcing banking stability in the longer run. Then I examine empirically the impact of higher deposit insurance coverage on promoting banking stability based on recently released cross-country databases. An explanation for the empirical results is given before the article concludes with the policy implication.

Keywords: FDIC banks, insured deposits, bank runs, U.S. banking crisis, banking crises, global financial crisis, Dodd Frank, banking regulation, government policy

JEL Classification: G01, E50, G00, G18, G28, G38

Suggested Citation

Chu, Kam Hon, Deposit Insurance and Banking Stability (January 19, 2011). Cato Journal, Vol. 31, No. 1, 2013. Available at SSRN:

Kam Hon Chu (Contact Author)

Memorial University of Newfoundland - Department of Economics ( email )

St. John's, Newfoundland A1C 5S7
709-864-8102 (Phone)
709-864-2094 (Fax)

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