Deposit insurance and bank liquidation without commitment: Can we sleep well?

Russell Cooper and Hubert Kempf ()

Economic Theory, 2016, vol. 61, issue 2, 365-392

Abstract: This paper assesses the effects of the orderly liquidation of a failing bank and the ex post provision of deposit insurance on the prospect of bank runs. Assuming that the public institutions in charge of these policies lack commitment power, these interventions, both individually and jointly, are chosen and undertaken ex post. The costs of liquidation and redistribution across heterogeneous households play key roles in these decisions. If investment is sufficiently illiquid, a credible liquidation policy will deter runs. Despite the lack of commitment, deposit insurance, funded by an ex post tax scheme, will be provided unless it requires a (socially) undesirable redistribution of consumption that outweighs insurance gains. If taxes are set optimally ex post, runs are prevented by deposit insurance without costly liquidation. If not, a combination of the two policies will prevent runs. Copyright Springer-Verlag Berlin Heidelberg 2016

Keywords: Bank runs; Commitment; Deposit insurance; Optimal liquidation; Redistribution; G21; G28; E61 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00199-015-0897-4 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Deposit insurance and bank liquidation without commitment: Can we sleep well? (2016)
Working Paper: Deposit insurance and bank liquidation without commitment: Can we sleep well? (2016)
Working Paper: Deposit insurance and bank liquidation without commitment: Can we sleep well? (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:61:y:2016:i:2:p:365-392

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-015-0897-4

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().