Redenomination Risk and Bank Runs in a Monetary Union with and Without Deposit Insurance Schemes

Abstract

This paper develops a basic framework characterized by a monetary union in which a shock to the policy interest rate, i.e. the determinant of a recessionary stance in the monetary policy, can imply that a member state finds it worthwhile to leave this union and/or that the corresponding banks declare bankruptcy. Our aim is to analyze the various possible reactions that bank depositors may have when this shock is transmitted to the interest rates on their bank deposits. We compare these reactions in two different policy frameworks characterized either by the presence or by the absence of a Centralized Deposit Insurance Scheme (CDIS). Our model shows that the introduction of a CDIS is per se not sufficient for zeroing the probability of bank runs.