Bank Runs, Deposit Insurance, and Bank Regulation, Part I

Widespread bank failures are often thought to be a possible consequence of a banking system without federal deposit insurance. This article considers whether federal deposit insurance is necessary to prevent bank runs. Part I describes some of the costs of providing deposit insurance and then introduces its justification and benefits. Part II, presented in the upcoming February 15 Economic Commentary, concludes with an examination of contagious bank runs and a discussion of how the market handled banking panics prior to the Federal Reserve System and the Federal Deposit Insurance Corporation.