Thursday, March 08, 2007

No more bank runs in the digital age... !

Last week I ran into this interesting bit of research of David R. Skeie of the the New York Fed. The title: Money and Modern Banking without Bank Runs almost says it all. We may need to revise our conceptual old thinking on bank runs, given todays digital age:
Nearly all of the theoretical bank run literature examines real demand deposits and describes historical bank runs based on currency withdrawals from the banking system. This paper adds to the Diamond-Dybvig model the features found in practice of nominal deposits, a goods market outside of the banking system and a clearinghouse for monetary payments and interbank lending. Together, these features in a modern economy imply that bank runs do not arise from pure liquidity-driven depositor runs, and neither deposit insurance nor suspension of convertibility is needed to prevent these runs.

Although one might conclude that we can do away with deposit insurance, the author des put his research into context to prevent such a hasty policy effect. Yet, it would make sense to reconsider the usefulness of deposit insurance for supervised credit-institutions in well developed economies. Particulary now that we see the emergence of P2P lending and P2P-banking. If we agree that all sorts of risks exist in life, why insure the money that is given to already supervised banks?