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Deposit Insurance and Orderly Liquidation without Commitment: Can we Sleep Well?

  • Russell Cooper
  • Hubert Kempf

This paper assess the affects 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 heterogenous households play key roles in these decisions. If investment is suffciently illiquid, a credible liquidation policy will deter runs. Deposit insurance will not be provided ex post if it requires a (socially) undesirable redistribution of consumption that outweighs insurance gains. Despite the lack of commitment, runs can be prevented by the provision of deposit insurance funded by an optimally designed ex post tax scheme.

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File URL: http://www.nber.org/papers/w19132.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19132.

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Date of creation: Jun 2013
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Handle: RePEc:nbr:nberwo:19132
Note: EFG
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  1. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation," NBER Working Papers 11655, National Bureau of Economic Research, Inc.
  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. Todd Keister, 2014. "Bailouts and Financial Fragility," Departmental Working Papers 201401, Rutgers University, Department of Economics.
  4. Kakwani, Nanak C, 1977. "Applications of Lorenz Curves in Economic Analysis," Econometrica, Econometric Society, vol. 45(3), pages 719-27, April.
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