Bailing out (Firms’) Uninsured Deposits : A Quantitative Analysis

We analyze the effects of (not) bailing out uninsured deposits in a quantitative, general equilibrium model in which firms’ deposits are valued for their safety and uninsured deposits might be bailed out by the government. Although an important fraction of households’ deposits are uninsured, and an even larger fraction for firms, the de facto policy of the FDIC has been to bail out most uninsured deposits: only 6% of bank failures resulted in losses on uninsured deposits from 2008 to 2022. Our calibrated model implies that, had the government not bailed out uninsured deposits in 2023, we would have observed a negligible impact on the economy. This result is the byproduct of two forces that offset each other. On the one hand, riskier deposits reduce firms’ ability to engage in production. On the other hand, the increase in the riskiness of uninsured deposits combined with financial frictions that prevent investors from quickly moving resources in and out of firms would have led firms to direct their funds away from deposits and toward investments in physical capital and employment. In work in progress, we explore the welfare effects of the bailouts and the implications for the optimal design of the deposit insurance scheme and the resolution process of failed banks