Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking?
We investigate whether the introduction of fixed-price U.S. federal deposit insurance in 1933 increased the risk-taking of banks over the succeeding period. We examine 60 financial institutions and find that banks and trusts in general became more risky after the introduction of deposit insurance. However, a subset of well-performing banks appears to have reduced their risk. Deposit insurance also reduced the incentives of depositors to discriminate between ex ante weaker and stronger banks thus reducing depositor discipline in return for greater banking system stability.
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- Edward J. Kane & Berry Wilson, 1998.
"A contracting-theory intepretation of the origins of Federal deposit insurance,"
Federal Reserve Bank of Cleveland, issue Aug, pages 573-595.
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- Saunders Anthony & Wilson Berry, 1995. "If History Could Be Rerun: The Provision and Pricing of Deposit Insurance in 1933," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 396-413, October. Full references (including those not matched with items on IDEAS)