A guide to deposit insurance reform

Antoine Martin

Economic Review, 2003, vol. 88, issue Q I, 29-54

Abstract: Deposit insurance was introduced in the United States during the Great Depression primarily to promote financial stability. Stability is enhanced because deposit insurance reduces the likelihood of a bank run. During its first four decades, deposit insurance appeared to work well as few banks failed. But in the 1980s, a wave of financial troubles in the banking and thrift industry exposed an unfortunate side of deposit insurance-moral hazard. In other words, deposit insurance encouraged undercapitalized depository institutions to take excessive risk. The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, was designed to prevent moral hazard, which many observers claim was a major cause of the 1980s crisis. ; Today's banking system is not in crisis. In fact, most banks are doing well. Still, both houses of Congress are debating new ways to reform deposit insurance. The view of many in the banking industry is that currently deposit insurance has a number of flaws. ; Martin provides a guide to key issues in the current deposit insurance debate. He gives a brief history of deposit insurance, exploring the roots of the problems that concern the industry today. Next, he provides an overview of the current reform proposals as they relate to three issues: the size of the fund, the structure of insurance premiums and rebates, and insurance coverage.

Keywords: Deposit; insurance (search for similar items in EconPapers)
Date: 2003
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