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

Part I of this article, presented in the February 1 Economic Commentary, described some of the costs and benefits of providing federal deposit insurance. The major benefit of providing deposit insurance is the prevention of contagious bank runs-a bank failure that spreads to solvent banks. Part II, presented here, discusses why bank runs may be contagious and examines some of the ways in which private clearinghouses protected against widespread bank failures. The article concludes that federally provided deposit insurance may not be necessary in order to protect against such bank runs.