Suppose you are a depositor at First Street Bank You hear a rumor that the bank has suffered serious losses on its loans Every depositor knows that the rumor isnt true, but each thinks that most other depositors believe the rumor Why, in the absence of deposit insurance, could this lead to a bank run How does deposit insurance change the situation

Question: Suppose you are a depositor at First Street Bank. You hear a rumor that the bank has suffered serious losses on its loans. Every depositor

Suppose you are a depositor at First Street Bank. You hear a rumor that the bank has suffered serious losses on its loans. Every depositor knows that the rumor isnʼt true, but each thinks that most other depositors believe the rumor. Why, in the absence of deposit insurance, could this lead to a bank run? How does deposit insurance change the situation?

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