[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/hal/pseptp/hal-01306030.html
   My bibliography  Save this paper

Deposit insurance and bank liquidation without commitment: Can we sleep well?

Author

Listed:
  • Russell Cooper
  • Hubert Kempf

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, ENS Cachan - École normale supérieure - Cachan, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract
This paper assesses the effects of the orderly liquidation of a failing bank and the ex post provision of deposit insurance on the prospect of bank runs. Assuming that the public institutions in charge of these policies lack commitment power, these interventions, both individually and jointly, are chosen and undertaken ex post. The costs of liquidation and redistribution across heterogeneous households play key roles in these decisions. If investment is sufficiently illiquid, a credible liquidation policy will deter runs. Despite the lack of commitment, deposit insurance, funded by an ex post tax scheme, will be provided unless it requires a (socially) undesirable redistribution of consumption that outweighs insurance gains. If taxes are set optimally ex post, runs are prevented by deposit insurance without costly liquidation. If not, a combination of the two policies will prevent runs.

Suggested Citation

  • Russell Cooper & Hubert Kempf, 2016. "Deposit insurance and bank liquidation without commitment: Can we sleep well?," PSE-Ecole d'économie de Paris (Postprint) hal-01306030, HAL.
    • Handle: RePEc:hal:pseptp:hal-01306030
    DOI: 10.1007/s00199-015-0897-4
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Antoine Martin, 2006. "Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(1), pages 197-211, May.
    2. Huberto M. Ennis & Todd Keister, 2009. "Bank Runs and Institutions: The Perils of Intervention," American Economic Review, American Economic Association, vol. 99(4), pages 1588-1607, September.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    4. James Peck & Karl Shell, 2003. "Bank Portfolio Restrictions and Equilibrium Bank Runs," Levine's Bibliography 666156000000000077, UCLA Department of Economics.
    5. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is it is or is it ain't your obligation? Regional debt in a fiscal federation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00310512, HAL.
    6. Russell Cooper & Hubert Kempf, 2011. "Deposit Insurance Without Commitment: Wall St. Versus Main St," NBER Working Papers 16752, National Bureau of Economic Research, Inc.
    7. Cooper, Russell & Ross, Thomas W., 1998. "Bank runs: Liquidity costs and investment distortions," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 27-38, February.
    8. Ennis, Huberto M. & Keister, Todd, 2010. "Banking panics and policy responses," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 404-419, May.
    9. Marco Cipriani & Antoine Martin & Patrick E. McCabe & Bruno Parigi, 2014. "Gates, Fees, and Preemptive Runs," Finance and Economics Discussion Series 2014-30, Board of Governors of the Federal Reserve System (U.S.).
    10. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is It Is Or Is It Ain'T My Obligation? Regional Debt In A Fiscal Federation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1469-1504, November.
    11. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 3-13.
    12. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
    13. Villamil, A P, 1991. "Demand Deposit Contracts, Suspension of Convertibility, and Optimal Financial Intermediation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 1(3), pages 277-288, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Russell Cooper & Kalin Nikolov, 2018. "Government Debt And Banking Fragility: The Spreading Of Strategic Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 1905-1925, November.
    2. Josef Schroth, 2021. "On the Distributional Effects of Bank Bailouts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 252-277, April.
    3. Allen, Franklin & Carletti, Elena & Goldstein, Itay & Leonello, Agnese, 2018. "Government guarantees and financial stability," Journal of Economic Theory, Elsevier, vol. 177(C), pages 518-557.
    4. Parnes, Dror, 2021. "Modeling the contagion of bank runs with a Markov model," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 174-187.
    5. Gao, Jiahong & Reed, Robert R., 2021. "Sunspot bank runs and fragility: The role of financial sector competition," European Economic Review, Elsevier, vol. 139(C).
    6. Mitkov, Yuliyan, 2020. "Inequality and financial fragility," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 233-248.
    7. Jianjun Miao, 2016. "Introduction to the symposium on bubbles, multiple equilibria, and economic activities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 207-214, February.
    8. Nizar, Muhammad Afdi & Mansur, Alfan, 2019. "Premi Penjaminan Simpanan Berbasis Risiko: Studi Kasus LPS Indonesia [Risk-Based Deposit Insurance Premium: A Case Study of Indonesia Deposit Insurance Corporation (IDIC)]," MPRA Paper 97894, University Library of Munich, Germany, revised 31 Dec 2019.
    9. Ettore Panetti & Filomena Garcia, 2017. "A Theory of Government Bailouts in a Heterogeneous Banking System," Working Papers w201716, Banco de Portugal, Economics and Research Department.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Todd Keister, 2016. "Bailouts and Financial Fragility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(2), pages 704-736.
    2. Todd Keister & Vijay Narasiman, 2016. "Expectations vs. Fundamentals- driven Bank Runs: When Should Bailouts be Permitted?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 89-104, July.
    3. Mitkov, Yuliyan, 2020. "Inequality and financial fragility," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 233-248.
    4. Huberto M. Ennis & Todd Keister, 2007. "Commitment and equilibrium bank runs," Staff Reports 274, Federal Reserve Bank of New York.
    5. Gao, Jiahong & Reed, Robert R., 2021. "Sunspot bank runs and fragility: The role of financial sector competition," European Economic Review, Elsevier, vol. 139(C).
    6. Sim, Khai Zhi, 2024. "Bank bailouts: Moral hazard and commitment," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    7. Gu, Chao & Monnet, Cyril & Nosal, Ed & Wright, Randall, 2023. "Diamond–Dybvig and beyond: On the instability of banking," European Economic Review, Elsevier, vol. 154(C).
    8. Gao, Jiahong & Reed, Robert R., 2024. "Increasing returns to scale and financial fragility," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    9. Russell Cooper & Hubert Kempf, 2013. "Deposit Insurance and Orderly Liquidation without Commitment: Can we Sleep Well?," NBER Working Papers 19132, National Bureau of Economic Research, Inc.
    10. Jiahong Gao & Robert R. Reed, 2023. "Preventing bank panics: The role of the regulator's preferences," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(2), pages 387-422, May.
    11. Ryuichiro Izumi, 2021. "Opacity: Insurance and Fragility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 146-169, April.
    12. Daniel Sanches, 2018. "Banking Panics and Output Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 148-171, July.
    13. Ryuichiro Izumi & Antonis Kotidis & Paul E. Soto, 2024. "Trademarks in Banking," Wesleyan Economics Working Papers 2024-004, Wesleyan University, Department of Economics.
    14. Li, Yang, 2017. "Interest rates and financial fragility," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 195-205.
    15. Keister, Todd & Mitkov, Yuliyan, 2023. "Allocating losses: Bail-ins, bailouts and bank regulation," Journal of Economic Theory, Elsevier, vol. 210(C).
    16. Ryuichiro Izumi & Yang Li, 2021. "Financial Stability with Fire Sale Externalities," Wesleyan Economics Working Papers 2021-002, Wesleyan University, Department of Economics.
    17. Kiss, Hubert János & Rodriguez-Lara, Ismael & Rosa-Garcia, Alfonso, 2022. "Who withdraws first? Line formation during bank runs," Journal of Banking & Finance, Elsevier, vol. 140(C).
    18. Douglas D. Davis & Robert J. Reilly, 2016. "On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 989-1017, August.
    19. Huberto M. Ennis & Todd Keister, 2006. "Banking Policy without Commitment: Suspension of Convertibility Taken Seriously," 2006 Meeting Papers 464, Society for Economic Dynamics.
    20. Huberto Ennis & Todd Keister, 2016. "Optimal banking contracts and financial fragility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 335-363, February.

    More about this item

    Keywords

    Bank runs; Commitment; Deposit insurance; Optimal liquidation; Redistribution;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:pseptp:hal-01306030. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Caroline Bauer (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.