Bank-runs and deposit insurance

This paper describes the problems of bank-runs and deposit insurance, establishes the extensive game model of bank-runs and deposit insurance and finds out the Nash equilibrium of the game model in the two cases whether or not deposit insurance is offered. We show that, deposit insurance is a double-edged sword, on the one hand, it increases the stability of banking system by averting bank-runs; on the other hand, it increase the instability of banking system instead because the depositors reduce the market discipline on the bank and the bank has the incentives of risk-taking excessively. Hence we must feel our way when we design the deposit insurance mechanism and handle such two decision tools as deposit insurance coverage and deposit insurance premium properly specially.