 THE DEFECTIVE DESIGN OF FEDERAL DEPOSIT INSURANCEKenneth E. Scott Contemporary Economic Policy, 1987, vol. 5, issue 1, 92-99 Abstract: Deposit insurance funds, especially the Federal Savings and Loan Insurance Corporation, are currently in visible trouble. Two central defects of the existing deposit insurance system are identified: (1) mispricing of the insurance premiums and (2) incentives for both the industry and the insurance agencies to postpone recognizing and realizing losses. Insurance premiums are mispriced because they are assessed at the same rate for all institutions, which creates a bias for banks to take greater risks. Practical difficulties of setting an appropriate risk‐based premium for each bank are real but not necessarily insurmountable. In particular, the sale by the bank of unsecured and uninsured debt could provide a market measure of default risk, under a given failure rule. The choice of a failure rule is also a critical matter. Current failure rules are poorly defined and permit insolvent institutions to continue in operation. Specifying a market value test of insolvency in the statutes would be helpful, but it would have to be supported by market‐value accounting requirements and stronger pressures on banking authorities not to defer action. Date: 1987 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:coecpo:v:5:y:1987:i:1:p:92-99 Ordering information: This journal article can be ordered from Access Statistics for this article Contemporary Economic Policy is currently edited by Brad R. Humphreys More articles in Contemporary Economic Policy from Western Economic Association International Contact information at EDIRC. |
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