Deposit Insurance and Orderly Liquidation without Commitment: Can we Sleep Well?

Russell Cooper and Hubert Kempf ()

No 19132, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper assess the affects 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 heterogenous households play key roles in these decisions. If investment is suffciently illiquid, a credible liquidation policy will deter runs. Deposit insurance will not be provided ex post if it requires a (socially) undesirable redistribution of consumption that outweighs insurance gains. Despite the lack of commitment, runs can be prevented by the provision of deposit insurance funded by an optimally designed ex post tax scheme.

JEL-codes: E42 E58 G01 G18 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-cba, nep-ias and nep-mac
Note: EFG
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Citations: View citations in EconPapers (4)

Published as Russell Cooper & Hubert Kempf, 2016. "Deposit insurance and bank liquidation without commitment: Can we sleep well?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 365-392, February.

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