This paper from “Federal Reserve Bank of New York Staff Reports” with the above title, introduces the notion that an old style run on the Bank cannot occur.  It goes further to propose that deposit insurance is not required, and in fact may encourage bank failures.

Hat tip – Linkdump

In a model of nominal demand deposits repayable in money within a
clearinghouse, I show that interbank lending and monetary prices imply that traditional bank runs do not occur. This finding suggests that deposit insurance may not be needed to prevent bank runs in a modern economy.

I am not qualified to discuss the mathematics on their model.  They suggest that:

This paper does not claim that bank runs do not occur in a modern economy, but rather that pure liquidity-driven depositor runs solved by deposit insurance are not the issue of concern.

They go on to suggest that lender of last resort, probably the government, is the final determinant of whether depositors will be repaid.  This resonates thinking about the Banking crisis in Canada in the 80’s and that was how it was resolved.

The papers premise is that old style runs, occurred when cash currency withdrawals exceeded the capacity of the Bank.  But today, electronic withdrawals are the norm, thus availability of cash is irrelevant.

If deposit insurance is no longer necessary to prevent depositor runs, then in recent times deposit insurance may have increased bank failures due to moral hazard, such as in the 1980s S&L crisis, without bringing any benefits.

Finally, back to Donald, at Linkdump for his interesting summary:

Although one might conclude that we can do away with deposit insurance, the author des put his research into context to prevent such a hasty policy effect. Yet, it would make sense to reconsider the usefulness of deposit insurance for supervised credit-institutions in well developed economies. Particularly now that we see the emergence of P2P lending and P2P-banking. If we agree that all sorts of risks exist in life, why insure the money that is given to already supervised banks?