Deposit guarantees increase moral hazard and the likelihood of bank runs
Deposit guarantees and insurance schemes protect depositors against losses but can encourage risk-taking behavior, or moral hazard, which subsequently increases vulnerability to bank runs and financial instability.
The retrieved literature consistently supports the long-standing economic view that deposit guarantees and safety nets mitigate immediate panic but induce moral hazard, which can lead to riskier banking practices and potential instability or runs.
Yin G, Song H, Wang J, Nicholas S, Maitland E. The COVID-19 Run on Medical Resources in Wuhan China: Causes, Consequences and Lessons.. 2021. https://doi.org/10.3390/healthcare9101362
Applies bank run theory and highlights how depositor moral hazard and inadequate insurance schemes drive runs on resources.
See more details
Antoine Martin. Liquidity Provision vs. Deposit Insurance: Preventing Bank Panics Without Moral Hazard. 2001. https://doi.org/10.2139/ssrn.293829
Demonstrates through a formal model that deposit insurance policies prevent certain runs but inherently create moral hazard problems.
Abdeljawad I, Rashid M, Abu Alia M, Qushtom R, Irshaid M, Sahyouni A. Cushion hypothesis and credit risk: Islamic versus conventional banks from the MENA region.. 2024. https://doi.org/10.1371/journal.pone.0306901
Notes that conventional banks commit moral hazards under the shadow of sovereign and deposit insurance guarantees due to a perceived safety net.
The paper trail · every fact has a biography
Challenge the receipt
Citation formatting by citeproc-js (Frank Bennett) and the Citation Style Language project. Source and licenses.
Terms · Privacy · How verdicts work · Dispute this receipt