Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/262055 
Year of Publication: 
2022
Series/Report no.: 
Staff Report No. 1005
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance. We find that deposits decline by around 20 percent during the run and that there is an equal outflow of retail and nonfinancial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks. In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but continues to function for surviving banks, which can borrow from other banks in response to deposit outflows. Since regular depositors appear uninformed, it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing "discipline" via short-term funding.
Subjects: 
bank run
deposit insurance
financial crises
JEL: 
G01
G21
N20
N24
Document Type: 
Working Paper

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