Deposit Insurance: Theories and Facts

Charles W. Calomiris () and Matthew Jaremski
Additional contact information
Charles W. Calomiris: Columbia Business School, Columbia University, New York, NY 10027

Annual Review of Financial Economics, 2016, vol. 8, issue 1, 97-120

Abstract: Economic theories posit that bank liability insurance is designed to serve the public interest by mitigating systemic risk in the banking system through the reduction of liquidity risk. Political theories, however, see liability insurance as serving the private interests of banks, bank borrowers, and depositors, potentially at the expense of the public interest. Empirical evidence—both historical and contemporary—supports the private-interest approach, as liability insurance has been associated with increases, rather than decreases, in systemic risk. Exceptions to this rule are rare and reflect design features that prevent moral hazard and adverse selection. Prudential regulation of insured banks has generally not been a very effective tool in limiting the systemic risk increases associated with liability insurance. This likely reflects purposeful failures in regulation; if liability insurance is motivated by private interests, then there would be little point to removing the subsidies it creates through strict regulation. The same logic explains why more effective policies for addressing systemic risk are not employed in place of liability insurance. The politics of liability insurance thus should not be narrowly construed to encompass only the vested interests of bankers. Indeed, in many countries, liability insurance has been installed as a pass-through subsidy targeted to particular classes of bank borrowers.

Keywords: market discipline; political economy; mortgage lending (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (50)

Downloads: (external link)
http://www.annualreviews.org/doi/10.1146/annurev-financial-111914-041923 (application/pdf)
Full text downloads are only available to subscribers. Visit the abstract page for more information.

Related works:
Working Paper: Deposit Insurance: Theories and Facts (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:anr:refeco:v:8:y:2016:p:97-120

Ordering information: This journal article can be ordered from
http://www.annualreviews.org/action/ecommerce

Access Statistics for this article

More articles in Annual Review of Financial Economics from Annual Reviews Annual Reviews 4139 El Camino Way Palo Alto, CA 94306, USA.
Bibliographic data for series maintained by http://www.annualreviews.org ().