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.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.


Log in;
  1. China corruption Isaac Lawrence/Getty Images

    The Next Battle in China’s War on Corruption

    • Chinese President Xi Jinping knows well the threat that corruption poses to the authority of the Communist Party of China and the state it controls. 
    • But moving beyond Xi's anti-corruption purge to build robust and lasting anti-graft institutions will not be easy, owing to enduring opportunities for bureaucratic capture.
  2. Italy unemployed demonstration SalvatoreEsposito/Barcroftimages / Barcroft Media via Getty Images

    Putting Europe’s Long-Term Unemployed Back to Work

    Across the European Union, millions of people who are willing and able to work have been unemployed for a year or longer, at great cost to social cohesion and political stability. If the EU is serious about stopping the rise of populism, it will need to do more to ensure that labor markets are working for everyone.

  3. Latin America market Federico Parra/Getty Images

    A Belt and Road for the Americas?

    In a time of global uncertainty, a vision of “made in the Americas” prosperity provides a unifying agenda for the continent. If implemented, the US could reassert its historical leadership among a group of countries that share its fundamental values, as well as an interest in inclusive economic growth and rising living standards.

  4. Startup office Mladlen Antonov/Getty Images

    How Best to Promote Research and Development

    Clearly, there is something appealing about a start-up-based innovation strategy: it feels democratic, accessible, and so California. But it is definitely not the only way to boost research and development, or even the main way, and it is certainly not the way most major innovations in the US came about during the twentieth century.

  5. Trump Trade speech Bill Pugliano/Getty Images .

    Preparing for the Trump Trade Wars

    In the first 11 months of his presidency, Donald Trump has failed to back up his words – or tweets – with action on a variety of fronts. But the rest of the world's governments, and particularly those in Asia and Europe, would be mistaken to assume that he won't follow through on his promised "America First" trade agenda.