Deposit insurance: a reconsideration

John H. Boyd, Chun Chang and Bruce Smith

No 593, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: This paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs, the way in which they are priced and the way in which they fund revenue shortfalls. We show that the central issue is how the government will make up any FDIC losses. Under one scheme for making up the losses, we show that FDIC policy is irrelevant: it does not matter what premium is charged, nor does it matter how big FDIC losses are. Under another scheme, all that matters is the magnitude of the losses. And there is no presumption that small losses are ?good.? We also show that multiple equilibria can be observed and Pareto ranked. Some economies may be ?trapped? in equilibria with inefficient financial systems. Our analysis provides counterexamples to the following propositions. (1) Actuarially fair pricing of deposit insurance is always desirable. (2) Implicit FDIC subsidization of banks through deposit insurance is always undesirable. (3) ?Large? FDIC losses are necessarily symptomatic of a poorly designed deposit insurance system.

Keywords: Deposit; insurance (search for similar items in EconPapers)
Date: 1998
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=759 (application/pdf)
http://www.minneapolisfed.org/research/wp/wp593.pdf

Related works:
Journal Article: Deposit insurance: a reconsideration (2002)
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:fip:fedmwp:593

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().