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BANK RUNS: DEPOSIT INSURANCE AND CAPITAL REQUIREMENTS*
Article first published online: 9 OCT 2008
DOI: 10.1111/1468-2354.t01-1-00003
1468-2354/asset/cover.gif?v=1&s=fed4433db533e45650aec00d1db3fbb7fcc93278 "International Economic Review")
Additional Information
How to Cite
COOPER, R. and ROSS1, T. W. (2002), BANK RUNS: DEPOSIT INSURANCE AND CAPITAL REQUIREMENTS*. International Economic Review, 43: 55–72. doi: 10.1111/1468-2354.t01-1-00003
Publication History
- Issue published online: 9 OCT 2008
- Article first published online: 9 OCT 2008
- Abstract
- Cited By
Diamond and Dybvig provide a model of intermediation in which deposit insurance can avoid socially undesirable bank runs. We extend the Diamond–Dybvig model to evaluate the costs and benefits of deposit insurance in the presence of moral hazard by banks and monitoring by depositors. We find that complete deposit insurance alone will not support the first-best outcome: depositors will not have adequate incentives for monitoring and banks will invest in excessively risky projects. However, an additional capital requirement for banks can restore the first-best allocation.