Deposit insurance and reinsurance

Volker Britz (), Hans Gersbach and Hans Haller ()
Additional contact information
Volker Britz: CER-ETH - Center of Economic Research at ETH Zurich
Hans Haller: Virginia Tech

Annals of Finance, 2021, vol. 17, issue 4, No 1, 425-470

Abstract: Abstract We study the consequences and optimal design of bank deposit insurance and reinsurance in a general equilibrium setting. The model involves two production sectors, financed by bonds and bank loans, respectively. Financial intermediation by banks is required in the model as we assume that one of the production sectors is risky and requires monitoring by banks. Households fund banks through deposits and equity. Deposits are explicitly insured and banks pay a premium per unit of deposits. Any remaining shortfall is implicitly guaranteed by the government. Two types of equilibria emerge: One type of equilibria supports the Pareto optimal allocation. In the other type, bank lending and the default risk are excessively large. The intuition is as follows: the combination of financial intermediation by banks, limited liability of bank shareholders, and deposit insurance makes deposits risk-free from the individual households’ perspective, although they involve risk from the societal point of view. This distorts investment choices and the resulting input allocation to production sectors. We show, however, that a judicious combination of deposit insurance and reinsurance eliminates all non-optimal equilibrium allocations. Our paper thus may provide a benchmark result for policy proposals advocating deposit insurance cum reinsurance.

Keywords: Financial intermediation; Deposit insurance; Capital structure; General equilibrium; Reinsurance (search for similar items in EconPapers)
JEL-codes: D53 E44 G2 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10436-021-00387-3 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
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:kap:annfin:v:17:y:2021:i:4:d:10.1007_s10436-021-00387-3

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10436/PS2

DOI: 10.1007/s10436-021-00387-3

Access Statistics for this article

Annals of Finance is currently edited by Anne Villamil

More articles in Annals of Finance from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().