Bank Capital and Deposit Insurance

Kaniska Dam () and Rajdeep Sengupta

No RWP 26-11, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper examines the relationship between bank capital and reliance on insured deposit funding. Contrary to the conventional moral-hazard view underlying risk-based capital regulation, U.S. bank data reveal a robust negative association between capital and the share of insured deposits. We develop a delegated-monitoring model in which banks choose between insured and uninsured deposit financing. Although monitoring increases with capital under both funding regimes, its sensitivity to capital is greater when deposits are uninsured, strengthening the relative attractiveness of uninsured funding for well-capitalized banks. Our contribution is to show that the relationship between bank capital and deposit insurance depends not only on the direct effect of capital on risk-taking, but also on how capitalization changes a bank’s incentives to monitor under different funding arrangements.

Keywords: bank monitoring; deposit insurance; bank capital (search for similar items in EconPapers)
JEL-codes: C78 D82 G11 (search for similar items in EconPapers)
Pages: 36
Date: 2026-08-31
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:103726

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DOI: 10.18651/RWP2026-11

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