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Bank Run, Liquidity, and Crisis

Professor Philip H. Dybvig

        At the 14th Asian Leadership Conference (ALC), Nobel laureate, Professor Philip H. Dybvig emphasized the necessity of introducing comprehensive deposit insurance to guarantee all bank deposits. He, along with Professor Douglas Diamond, developed the “Diamond-Deepbig” model, revealing the vulnerability of banks to massive deposit withdrawals. Their work earned them the Nobel Prize in Economics. During the conference, Professor Philip H. Dybvig discussed stability measures for financial institutions with Professor Sung Tae-yoon.

        “Although I am not a proponent of government intervention or regulation, ensuring the safety of people’s bank deposits is paramount. The spread of the belief that deposits are not secure can trigger a swift ‘bank run’ with disastrous consequences, as we witnessed with the bankruptcy of Silicon Valley Bank (SVB).”

        To prevent bank runs, Philip H. Dybvig stressed the need for full deposit insurance, assuring individuals that their deposits are completely protected. He suggested that current partial insurance systems be replaced with broader coverage. Although full deposit insurance presents moral hazard concerns, Professor Seong proposed alternative approaches such as providing sufficient liquidity.

        In response to the SVB crisis, Professor Dybvig criticized relying solely on historical data for regulatory measures. He emphasized the importance of quick and informed decision-making based on economic theories, rather than relying on data alone.

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