Optimal Deposit Insurance In A Macroeconomic Model With Runs

Vedant Agarwal

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: This paper examines the effects of deposit insurance in a quantitative macroeconomic model that incorporates the risk of deposit runs faced by banks. During systemic panic episodes, alert uninsured depositors tend to withdraw their funds from banks they perceive as vulnerable. While deposit insurance reduces banks’ susceptibility to such runs, it may also weaken their risk management incentives, resulting in a Ushaped relationship between insurance coverage and the risk of bank failure. The model suggests that the welfare-maximizing level of deposit insurance coverage for the U.S. in 2008 closely aligns with the observed level. A moderate increase in coverage may be optimal in contexts of heightened depositor alertness—driven by technological or demographic factors—, greater fiscal capacity or stronger capital requirements.

Keywords: insurance; bank runs; moral hazard (search for similar items in EconPapers)
JEL-codes: E62 G01 G21 G28 G32 (search for similar items in EconPapers)
Pages: 46
Date: 2025-09
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.cafral.org.in/sfControl/content/Speech ... arwal_Optimal-DI.pdf

Related works:
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:ris:cafral:022258

Access Statistics for this paper

More papers in Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL) Contact information at EDIRC.
Bibliographic data for series maintained by Vijayshree ().