Optimal Deposit Contracts: Do-It-Yourself Bank-Run Prevention for Banks
The need for federal deposit insurance is often based on the claim that it prevents bank runs and makes the banking system more stable. But research shows that banks could prevent bank runs by constructing their deposit contracts appropriately, and, in the absence of deposit insurance, they would do so in their own self interest. Federal deposit insurance may be useful as insurance per se—protecting depositors against unforeseen accidents—but it should not be considered necessary for banking system stability.
The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit clevelandfed.org for updates.