Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk

Richard Berner, Marco Cipriani, Michael Holscher, Antoine Martin and Patrick E. McCabe
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Patrick E. McCabe: https://www.federalreserve.gov/econres/patrick-e-mccabe.htm

No 20230414, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The incentives that drive bank runs have been well understood since the seminal work of Nobel laureates Douglas Diamond and Philip Dybvig (1983). When a bank is suspected to be insolvent, early withdrawers can get the full value of their deposits. If and when the bank runs out of funds, however, the bank cannot pay remaining depositors. As a result, all depositors have an incentive to run. The failures of Silicon Valley Bank and Signature Bank remind us that these incentives are still present for uninsured depositors, that is, those whose bank deposits are larger than deposit insurance limits. In this post, we discuss a policy proposal to reduce uninsured depositors’ incentives to run.

Keywords: bank run; Minimum Balance at Risk; money market funds (MMFs); uninsured deposits (search for similar items in EconPapers)
JEL-codes: F0 G01 G2 (search for similar items in EconPapers)
Date: 2023-04-14
New Economics Papers: this item is included in nep-ban, nep-mon and nep-rmg
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