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Optimal Deposit Insurance

Eduardo Dávila1,2; Itay Goldstein1

1 National Bureau of Economic Research · 2 Yale University

Journal of Political Economy 2023

This paper studies the optimal determination of deposit insurance when bank runs are possible. We show that the welfare impact of changes in the level of deposit insurance coverage can be generally expressed in terms of a small number of sufficient statistics, which include the level of losses in specific scenarios and the probability of bank failure. We characterize the wedges that determine the optimal ex ante regulation, which map to asset- and liability-side regulation. We demonstrate how to employ our framework in an application to the most recent change in coverage in the United States, which took place in 2008.

DOI
10.1086/723633
Volume
131 (7)
Pages
1676-1730
Language
en
Export
BibTeX
Sources
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