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- Title
The optimal distribution of insured and uninsured deposits across banks.
- Authors
Voellmy, Lukas
- Abstract
I study a model of self-fulfilling bank runs where government-provided deposit insurance covers small (retail) deposits but not large (wholesale) deposits. The share of the banking system that may be affected by runs depends on the distribution of retail and wholesale deposits across banks. The magnitude of runs is minimized if banks with both retail and wholesale depositors (reminiscent of commercial banks) coexist with banks that cater only to wholesale depositors (reminiscent of shadow banks). The shadow banking sector should be large enough to absorb enough wholesale deposits from commercial banks to keep them shielded from runs. In a decentralized equilibrium, the magnitude of runs tends to be larger than optimal as a result of wholesale depositors' incentive to invest in the banks with the highest share of retail depositors.
- Subjects
DEPOSIT banking; SHADOW banking system; NONBANK financial institutions; BANK runs; BANKING industry; BANK deposits; DEPOSIT insurance
- Publication
Macroeconomic Dynamics, 2023, Vol 27, Issue 8, p2252
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100522000694