Deposit Insurance and Banking Stability

This article will examine in a more systematic way the effectiveness of deposit insurance coverage in maintaining banking stability. More specifically, I argue that raising deposit insurance coverage in an attempt to eradicate bank runs is not necessarily the optimal policy because bank runs, though commonly perceived as instability when they take place, have their positive role to play in reinforcing banking stability in the longer run. Then I examine empirically the impact of higher deposit insurance coverage on promoting banking stability based on recently released cross-country databases. An explanation for the empirical results is given before the article concludes with the policy implication