Deposit insurance reduces liquidity risk but can increase insolvency risk by encouraging reckless behavior. Several U.S. states installed deposit insurance laws before the creation of the FDIC, and those laws only applied to some depository institutions within those states. These experiments...

Recent models of banking under asymmetric information argue that depositors penalize banks that offer high-risk deposits. Focusing on New York City banks in the 1920's and 1930's, this study examines how banks manage risk during normal times and in response to severe shocks. We develop and apply...