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Bank Failures: The Deposit Insurance Connection

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  • GERALD P. O'DRISCOLL

Abstract

It is generally accepted that banks must be regulated so as to avoid the moral hazard situation that deposit insurance generates. Accepting this argument implies that expanded bank powers must await deposit insurance reform. This article rejects the accepted view and argues instead that the existing regulatory system enhances rather than diminishes the riskiness of banks' portfolios. The article argues that the benefits from permitting banks to diversify probably would outweigh the costs. It concludes, however, that deposit insurance is a major culprit in the current wave of bank failures. Copyright 1988 Western Economic Association International.

Suggested Citation

  • Gerald P. O'Driscoll, 1988. "Bank Failures: The Deposit Insurance Connection," Contemporary Economic Policy, Western Economic Association International, vol. 6(2), pages 1-12, April.
  • Handle: RePEc:bla:coecpo:v:6:y:1988:i:2:p:1-12
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7287.1988.tb00282.x
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    References listed on IDEAS

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    1. James R. Barth & R. Dan Brumbaugh, Jr. & Daniel Sauerhaft & George H. K. Wang, 1985. "Insolvency And Risk-Taking In The Thrift Industry: Implications For The Future," Contemporary Economic Policy, Western Economic Association International, vol. 3(5), pages 1-32, September.
    2. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    3. Kareken, John H, 1983. "The First Step in Bank Deregulation: What about the FDIC?," American Economic Review, American Economic Association, vol. 73(2), pages 198-203, May.
    4. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, January.
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    Cited by:

    1. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 689-700, November.
    2. Cordella, Tito & Yeyati, Eduardo Levy, 2002. "Financial opening, deposit insurance, and risk in a model of banking competition," European Economic Review, Elsevier, vol. 46(3), pages 471-485, March.
    3. Wheelock David C. & Kumbhakar Subal C., 1994. "The Slack Banker Dances: Deposit Insurance and Risk-Taking in the Banking Collapse of the 1920s," Explorations in Economic History, Elsevier, vol. 31(3), pages 357-375, July.

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