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The Run for Safety: Financial Fragility and Deposit Insurance

51 Pages Posted: 22 May 2016 Last revised: 13 Mar 2017

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Thais Laerkholm Jensen

Independent

Niels Johannesen

University of Copenhagen

Adam Sheridan

University of Copenhagen

Date Written: February 22, 2017

Abstract

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

Iyer, Rajkamal and Jensen, Thais Laerkholm and Johannesen, Niels and Sheridan, Adam, The Run for Safety: Financial Fragility and Deposit Insurance (February 22, 2017). Available at SSRN: https://ssrn.com/abstract=2780073 or http://dx.doi.org/10.2139/ssrn.2780073

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Thais Lærkholm Jensen

Independent ( email )

No Address Available

Niels Johannesen

University of Copenhagen ( email )

Nørregade 10
Copenhagen, DK-1165
Denmark

Adam Sheridan (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, DK-1165
Denmark

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