Journal Article

Optimal deposit contracts: do-it-yourself bank-run prevention for banks

Abstract: The need for federal deposit insurance is often based on the claim that it prevents bank runs and makes the banking system more stable. But research shows that banks could prevent bank runs by constructing their deposit contracts appropriately, and, in the absence of deposit insurance, they would do so in their own self interest. Federal deposit insurance may be useful as insurance per se?protecting depositors against unforeseen accidents?but it should not be considered necessary for banking system stability.

Keywords: Bank failures; Financial crises; Deposit insurance;

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Economic Commentary

Publication Date: 2006

Issue: Jan

Order Number: 2