Bank Runs: Deposit Insurance and Capital Requirements

18 Pages Posted: 16 May 2002

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Thomas W. Ross

University of British Columbia (UBC) - Sauder School of Business

Abstract

Diamond and Dybvig provide a model of intermediation in which deposit insurance can avoid socially undesirable bank runs. We extend the Diamond-Dybvig model to evaluate the costs and benefits of deposit insurance in the presence of moral hazard by banks and monitoring by depositors. We find that complete deposit insurance alone will not support the first-best outcome: Depositors will not have adequate incentives for monitoring and banks will invest in excessively risky projects. However, an additional capital requirement for banks can restore the first-best allocation.

Suggested Citation

Cooper, Russell W. and Ross, Thomas, Bank Runs: Deposit Insurance and Capital Requirements. International Economic Review, Vol. 43, pp. 55-72, 2002. Available at SSRN: https://ssrn.com/abstract=312520

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Thomas Ross

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
(604) 822-8500 (Phone)
(604) 822-8521 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
23
Abstract Views
1,944
PlumX Metrics