Banking Without Deposit Insurance or Bank Panics: Lessons From a Model of the U.S. National Banking System

Abstract

A series of models of bank panics was constructed to capture 2 key features of the US National Banking System: 1. the limits on bank branching, and 2. the ability of banks to circumvent reserve requirements. These features meant that the interbank borrowing and lending market did not perform very well. The result was that banks were not able to diversify away withdrawal risk. Therefore, banks were susceptible to runs, while the banking system was susceptible to panics. A main feature of the National Banking System is that it inhibited …