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Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk

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Abstract

The incentives that drive bank runs have been well understood since the seminal work of Nobel laureates Douglas Diamond and Philip Dybvig (1983). When a bank is suspected to be insolvent, early withdrawers can get the full value of their deposits. If and when the bank runs out of funds, however, the bank cannot pay remaining depositors. As a result, all depositors have an incentive to run. The failures of Silicon Valley Bank and Signature Bank remind us that these incentives are still present for uninsured depositors, that is, those whose bank deposits are larger than deposit insurance limits. In this post, we discuss a policy proposal to reduce uninsured depositors’ incentives to run.

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  • Richard Berner & Marco Cipriani & Michael Holscher & Antoine Martin & Patrick E. McCabe, 2023. "Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk," Liberty Street Economics 20230414, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:95972
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    File URL: https://libertystreeteconomics.newyorkfed.org/2023/04/mitigating-the-risk-of-runs-on-uninsured-deposits-the-minimum-balance-at-risk/
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    Keywords

    bank run; Minimum Balance at Risk; money market funds (MMFs); uninsured deposits;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • G2 - Financial Economics - - Financial Institutions and Services
    • G01 - Financial Economics - - General - - - Financial Crises

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