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Deposit insurance

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  • White, Eugene

Abstract

Should deposit insurance be recommended? No. History teaches us three lessons: 1) deposit insurance was not adopted primarily to protect the depositor. There were many ways to increase the soundness of the banking system. The leading alternative was to allow branching and the diversification of institutions by geography and product line. But monetary contraction and the politics of the banking crisis empowered small banks instead; 2) the history of federal and state insurance plans shows that it is all but impossible to escape the moral hazard and other problems inherent in deposit insurance; and 3) in setting up banking regulations, including deposit insurance, a banking lobby will be created that will campaign to protect the industry as it stands, and the industry will be pushed on a course that will be difficult to alter. The public is greatly concerned about the safety of its deposits. The problem is one of information: for households and small businesses, it is costly to monitor the performance of banks and decide which is safest. There is strong historical precedent for at least one alternative to deposit insurance and its perverse effects: regulators could require each bank to offer deposit accounts that are segregated, treasury-bill mutual funds. This type of account is effectively insurance from the government, with the same guarantee as government bonds, but without the wrong incentives for financial institutions that arise from deposit insurance.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1541.

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Date of creation: 30 Nov 1995
Date of revision:
Handle: RePEc:wbk:wbrwps:1541

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Related research

Keywords: Banks&Banking Reform; Insurance&Risk Mitigation; Financial Intermediation; Payment Systems&Infrastructure; Financial Crisis Management&Restructuring; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Insurance&Risk Mitigation; Insurance Law;

References

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  1. Charles W. Calomiris & Eugene N. White, 1994. "The Origins of Federal Deposit Insurance," NBER Chapters, in: The Regulated Economy: A Historical Approach to Political Economy, pages 145-188 National Bureau of Economic Research, Inc.
  2. White, Eugene Nelson, 1986. "Before the Glass-Steagall Act: An analysis of the investment banking activities of national banks," Explorations in Economic History, Elsevier, vol. 23(1), pages 33-55, January.
  3. Charles W. Calomiris, 1989. "Deposit insurance: lessons from the record," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 10-30.
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Citations

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Cited by:
  1. Keefer, Philip, 2007. "Beyond legal origin and checks and balances : political credibility, citizen information, and financial sector development," Policy Research Working Paper Series 4154, The World Bank.
  2. Laeven, Luc, 2004. "The political economy of deposit insurance," Policy Research Working Paper Series 3247, The World Bank.
  3. Glenn Boyle & Richard Meade, 2008. "Intra-country regulation of share markets: does one size fit all?," European Journal of Law and Economics, Springer, vol. 25(2), pages 151-165, April.
  4. Randall S. Kroszner, 2000. "The economics and politics of financial modernization," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 25-37.
  5. Randall S. Kroszner & Philip E. Strahan, 2001. "Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms," NBER Chapters, in: Prudential Supervision: What Works and What Doesn't, pages 233-272 National Bureau of Economic Research, Inc.
  6. Randall S. Kroszner & Philip E. Strahan, 2013. "Regulation and Deregulation of the U.S. Banking Industry: Causes, Consequences and Implications for the Future," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned? National Bureau of Economic Research, Inc.
  7. Frederic S. Mishkin, 1999. "Financial Consolidation: Dangers and Opportunities," NBER Working Papers 6655, National Bureau of Economic Research, Inc.
  8. Keefer, Philip, 2004. "Elections, special interests, and the fiscal costs of financial crisis," Policy Research Working Paper Series 3439, The World Bank.
  9. Claessens, Stijn & Klingebiel, Daniela, 1999. "Alternative frameworks for providing financial services," Policy Research Working Paper Series 2189, The World Bank.
  10. Eugene N. White, 2011. "“To Establish a More Effective Supervision of Banking”: How the Birth of the Fed Altered Bank Supervision," NBER Working Papers 16825, National Bureau of Economic Research, Inc.
  11. Milhaupt, Curtis-J, 1999. "Japan's Experience with Deposit Insurance and Failing Banks: Implications for Financial Regulatory Design?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(2), pages 21-46, August.
  12. Randall S. Kroszner & Philip E. Strahan, 2000. "Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms," CRSP working papers 512, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  13. Eugene N. White, 2009. "Lessons from the Great American Real Estate Boom and Bust of the 1920s," NBER Working Papers 15573, National Bureau of Economic Research, Inc.
  14. Randall S. Kroszner, 1999. "Is the Financial System Politically Independent? Perspectives on the Political Economy of Banking and Financial Regulation," CRSP working papers 492, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  15. Asli Demirguc-Kunt & Edward J. Kane & Luc Laeven, 2007. "Determinants of Deposit-Insurance Adoption and Design," NBER Working Papers 12862, National Bureau of Economic Research, Inc.
  16. Kris James Mitchener & David C. Wheelock, 2010. "Does the Structure of Banking Markets Affect Economic Growth? Evidence from U.S. State Banking Markets," NBER Working Papers 15710, National Bureau of Economic Research, Inc.
  17. Klein, Michael, 1999. "Money, politics and a future for the international financial system," Policy Research Working Paper Series 2226, The World Bank.

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