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The Run for Safety: Financial Fragility and Deposit Insurance

Rajkamal Iyer, Thais Jensen, Niels Johannesen and Adam Sheridan
Additional contact information
Rajkamal Iyer: MIT Sloan, Cambridge
Thais Jensen: Department of Economics, University of Copenhagen
Adam Sheridan: Department of Economics, University of Copenhagen

EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: We study a run on uninsured deposits in Danish banks triggered by a reform that limited deposit insurance coverage. Using a unique dataset with information about all individual accounts in Danish banks, we show that the reform caused a 50% decrease in deposits above the insurance limit in non-systemic banks, but a much smaller decrease in systemic banks which experienced less withdrawals from uninsured accounts, but also more openings of new uninsured accounts. Our results highlight the significant risks from a differential reallocation of uninsured deposits across banks and, in turn, the need for high insurance limits during a crisis.

Pages: 50 pages
Date: 2016-05-18
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ias
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