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Quantifying the Impact of Deposit Insurance on Bank Run Risk

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  • Johannes Eybers

    (School of Economics, University of the Witwatersrand, Johannesburg 2050, South Africa)

  • Gary van Vuuren

    (School of Economics, University of the Witwatersrand, Johannesburg 2050, South Africa)

Abstract

This paper examines the effectiveness of deposit insurance in reducing bank run risk using an agent-based model with heterogeneous depositor behavior, including random withdrawals, risk-based responses, and peer-driven contagion. The results reveal a nonlinear stability pattern with a narrow transition region separating solvency from collapse. Within this region, deposit insurance mainly improves stability by shifting the critical threshold and extending time-to-failure. Across all scenarios, behavioral and structural factors, including wealth inequality, risk aversion, depositor awareness, and contagion, systematically affect the location and sharpness of this transition without removing it. Fragility rises sharply beyond moderate inequality (Gini ≈ 0.5), while depositor awareness and peer effects act as coordination mechanisms that accelerate collapse. Overall, deposit insurance is a powerful but limited stabilization tool: it strengthens resilience but does not alter the underlying dynamics of systemic risk. These findings suggest that effective policy must also address the behavioral and informational drivers of bank runs.

Suggested Citation

  • Johannes Eybers & Gary van Vuuren, 2026. "Quantifying the Impact of Deposit Insurance on Bank Run Risk," JRFM, MDPI, vol. 19(6), pages 1-21, June.
    • Handle: RePEc:gam:jjrfmx:v:19:y:2026:i:6:p:404-:d:1957434
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