Skip to main content

An Alternative to Deposit Insurance

Argentina's financial panic and the run on its banks that ensued, as well as Asia's financial crisis of 1997, have forced a number of countries to consider adopting deposit insurance schemes to protect their citizens' savings. But is deposit insurance the best defense against bank panics?

Deposit insurance was a response to banking crises of the type that plagued the United States until the 1930's. The first explicit scheme was introduced in America after the Great Depression and initially seemed an unmitigated success. Panics no longer occurred, which stabilized the financial system and contributed to sustained post-war economic growth.

Deposit insurance did away with financial panics because bank runs are typically driven by a self-fulfilling prophecy. They occur when a bank's clients fear that most of their fellow depositors will withdraw their funds. Because banks service their depositors on a first-come-first-served basis, those who wait risk being left empty-handed, because the bank may be forced to liquidate its long term-assets at a loss and run out of resources. So fear of a panic can create a panic. This is highly inefficient, because while it is individually rational for depositors to want their money immediately, the bank might have been able to service all of them had they been collectively patient.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.


Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.;
  1. haass105_Gustavo BassoNurPhoto via Getty Images_amazon Gustavo Basso/NurPhoto via Getty Images

    The Amazon and You

    Richard N. Haass

    Sovereignty entails obligations as well as rights, and where compliance cannot be induced, pressure must be applied. And though positive incentives to encourage and enable compliance would be preferable, Brazil's government is showing that there must be sticks where carrots are not enough.

  2. GettyImages-1151170958 ADRIAN DENNIS/AFP/Getty Images

    The Meritocracy Muddle

    Eric Posner

    Although populism in Western democracies is nothing new, resentment toward elites and experts has certainly been on the rise. Does this trend reflect a breakdown in the system, or a system that is actually working too well?


Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions