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Economic Brief

March 7, 2018

Richmond Fed Research Highlights a New Way of Preventing Bank Runs

The latest Economic Brief from the Federal Reserve Bank of Richmond suggests that bank runs could be prevented by creating deposit contracts that would eliminate depositor fears that a bank might run out of reserves.

In this new model, depositors would have the option of paying a small fee to put their money in a priority account. Alternatively, depositors could put their money in a regular account from which they could withdraw funds during a run on the condition that they forfeit all interest. If a run occurred, the return on the priority account would exceed the return on a regular account, with or without early withdrawal from the latter. But if a run did not occur, the return on a regular account would exceed the return on a priority account.

According to the authors of the paper, if enough depositors choose the priority account, the bank would know that a fear-based run is occurring. Such an event could be used to trigger a suspension of withdrawals, ending the run. Because depositors know suspensions would be triggered before fear-based withdrawals affected their payouts, this would eliminate the incentive for fear-based runs.

The Richmond Fed’s Economic Brief series provides web-exclusive essays on current economic issues and trends. Sign up to receive an email notification when a new essay is posted.

As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District—including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia—to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.


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