Optimal deposit contracts: do-it-yourself bank-run prevention for banks

Ed Nosal

Economic Commentary, 2006, issue Jan

Abstract: The need for federal deposit insurance is often based on the claim that it prevents bank runs and makes the banking system more stable. But research shows that banks could prevent bank runs by constructing their deposit contracts appropriately, and, in the absence of deposit insurance, they would do so in their own self interest. Federal deposit insurance may be useful as insurance per se?protecting depositors against unforeseen accidents?but it should not be considered necessary for banking system stability.

Keywords: Bank failures; Financial crises; Deposit insurance (search for similar items in EconPapers)
Date: 2006
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