| Abstract: |
The effectiveness of deposit insurance in eliminating panic runs varies with the size of
coverage and the degree of supervisory involvement of the agency in charge of
insurance. When the agency is not involved in the supervision of banks, partial
insurance preserves the monitoring role of depositors and reduces the region for which
runs occur, but it is unable of completely eliminating them. When the agency has a high
degree of supervisory involvement, even with partial insurance panic runs disappear as
the regulator's signal becomes more precise. However, the smaller the protection offered
to depositors, the higher is forbearance. Deposit insurance induces moral hazard by
increasing the equilibrium value of the demand deposit contract in the interim period,
though this effect seems to be smaller under a broad mandate. Therefore, a scheme
where the insurance agency has more supervisory involvement should be preferred. |
Banco Central de Chile