Voluntary insurance vs. stabilization funds: An experimental analysis on bank runs

Iván Barreda-Tarrazona (), Gianluca Grimalda and Andrea Teglio

Journal of Behavioral and Experimental Finance, 2024, vol. 42, issue C

Abstract: Banking crises have recurrently emphasized the crucial need for establishing effective mechanisms to prevent bank runs, and different organizations are exploring a range of potential measures. With the aim of contributing to this debate, we run a laboratory experiment to study the effectiveness of two untested devices: Stability funds that automatically limit depositors’ possibility of withdrawing their assets, and voluntary individual insurance against the risk of default. Depositors start the interaction with a monetary endowment deposited in a bank. They can then withdraw money before and after the bank suffers a liquidity loss. Such a loss can be either permanent or temporary, but its nature will only be discovered at the end of the interaction. The bank defaults if the desired withdrawals exceed its available liquidity. Our results show that the only effective mechanism in reducing bank defaults, compared to the baseline, is the stability fund with high coverage. When groups have a high share of female depositors, there is a significant reduction in the likelihood of bank runs, which can be explained by women’s higher propensity to buy insurance. When a critical liquidity signal is issued, indicating a dangerous situation, women’s lower propensity to withdraw disappears, bringing it to levels similar to that of men.

Keywords: Bank runs; Stabilization; Insurance; Experimental finance; Bail-in; Bail-out (search for similar items in EconPapers)
JEL-codes: C92 G01 G21 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:42:y:2024:i:c:s2214635024000248

DOI: 10.1016/j.jbef.2024.100909

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