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Funding deposit insurance

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  • Oosthuizen, Dick
  • Zalla, Ryan

Abstract

We present a quantitative model of deposit insurance to characterize the optimal levels of coverage for depositors and premiums raised from banks. Premiums contribute to a deposit insurance fund that lowers taxpayers’ resolution cost of bank failures. The key model tension is the policymaker’s dynamic tradeoff between building a fund to discourage moral hazard and insulate taxpayers from large fiscal shortfalls, and allowing banks to productively invest their deposits. We find that risk-adjusted premiums reduce moral hazard, enabling the policymaker to increase the share of covered deposits to total deposits by 12.5 percentage points and decrease the share of expected annual bank failures from 0.74% to 0.60%. The model predicts a fund-to-covered-deposits ratio that matches the data and declines in taxpayers’ income due to taxpayers’ risk aversion.

Suggested Citation

  • Oosthuizen, Dick & Zalla, Ryan, 2024. "Funding deposit insurance," Journal of Financial Stability, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:finsta:v:75:y:2024:i:c:s157230892400127x
    DOI: 10.1016/j.jfs.2024.101342
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    More about this item

    Keywords

    Deposit insurance; Bank runs; Bank regulation; Bank risk-taking;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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