The Run for Safety: Financial Fragility and Deposit Insurance
51 Pages Posted: 22 May 2016 Last revised: 13 Mar 2017
Date Written: February 22, 2017
We study a run on uninsured deposits in Danish banks triggered by a reform that limited deposit insurance coverage. Using a unique dataset with information about all individual bank accounts, we show that the reform caused a 50% decrease in deposits above the insurance limit in non-systemic banks, but a much smaller decrease in systemic banks which experienced less withdrawals of uninsured balances, but also more openings of new uninsured accounts. The differential reallocation of uninsured deposits highlights the destabilizing effects of banks that are too-big-to-fail and the important role of deposit insurance in mitigating this financial fragility.
Keywords: Bank runs, Deposit insurance, Implicit guarantees, Too-big-to-fail
JEL Classification: D12, G21, G28, O16
Suggested Citation: Suggested Citation