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The optimal distribution of insured and uninsured deposits across banks

Published online by Cambridge University Press:  09 January 2023

Lukas Voellmy
Lukas Voellmy*
Affiliation:
Swiss National Bank, Boersenstrasse 15, P.O. Box 8022, Zurich, Switzerland
*
Email: lukas.voellmy@snb.ch
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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.

Keywords

Deposit insurancebank runsshadow banking
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 8 , December 2023 , pp. 2252 - 2269
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

*

An earlier version of this paper circulated under the title “Shadow Banking and Financial Stability under Limited Deposit Insurance”. I thank Ina Bialova (discussant), Corinne Dubois (discussant), Huberto Ennis, Leonardo Gambacorta (discussant), Todd Keister, Cyril Monnet, Ewelina Laskowksa, and two anonymous referees for particularly helpful comments on various versions of the paper. The views expressed in this paper are those of the author and do not necessarily reflect those of the Swiss National Bank.

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