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Title:Will an optimal deposit insurance always increase financial stability? PDF Logo
Authors:Drehmann, Mathias
Issue Date:2002
Series/Report no.:Bonn econ discussion papers 2002,28
Abstract:In this paper we show that deposit insurance can increase the probability of systemic banking crisis, even though it is optimally designed and its premium is risk related. This is driven by the possibility of contagious bank runs. We prove that contagion only occurs if the correlation between the portfolios of banks is high enough. Without deposit insurance contagious bank runs can impose such great losses on banks, that banks choose less correlated portfolios to avoid contagion altogether. Optimal deposit insurance eliminates this incentive and thus the correlation of portfolios and with it the probability of systemic banking crisis can increase.
Subjects:Bank runs
contagion
systemic risk
investment of banks
deposit insurance
JEL:G28
G21
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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