Deposit Insurance with Caps: Does it Prevent Runs?

15:40-17:00, Friday, September 20, 2024

I-206, Boxue Building

Russell Cooper, a professor at Liaoning University, a NBER Faculty Research Associate, the Fellow of the Econometric Society. He received his Ph.D. in Economics from the University of Pennsylvania. He has previously held academic positions at European University Institute, the University of Texas, Yale University, the University of Iowa, Pennsylvania State University and Boston University. He has published over 100 publications in macroeconomics, international economics, industrial organization, experimental economics, labour economics and monetary economics. He is also the author of the book Coordination Games, and the co-author of Dynamic Economics with Jerome Adda.  Prof. Cooper is best known for his works on coordination games and adjustment costs.

This paper studies the impact of a deposit insurance cap on bank fragility. Designing credible policy that can avoid bank runs is a prominent policy concern. The paper focuses on two key dimensions. First, as seen in schemes worldwide, deposit insurance is capped, providing a maximal amount of coverage. Second, deposit insurance must be credible to be effective: governments must have an ex post incentive to fulfill their promises. These two features interact: the cap limits the redistribution from poor to rich inherent in deposit insurance and thus make it more credible. But the cap that makes DI credible, might be insufficient to prevent runs. The paper provides conditions for the provision of credible deposit insurance with caps such that runs are avoided.

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