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Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking?


  • DeLong, Gayle
  • Saunders, Anthony


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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  • DeLong, Gayle & Saunders, Anthony, 2011. "Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking?," Journal of Financial Stability, Elsevier, vol. 7(1), pages 19-25, January.
  • Handle: RePEc:eee:finsta:v:7:y:2011:i:1:p:19-25

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    References listed on IDEAS

    1. Edward J. Kane & Berry Wilson, 1998. "A contracting-theory intepretation of the origins of Federal deposit insurance," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 573-595.
    2. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-1153, September.
    3. Merton, Robert C, 1978. "On the Cost of Deposit Insurance When There Are Surveillance Costs," The Journal of Business, University of Chicago Press, vol. 51(3), pages 439-452, July.
    4. Schumacher, Liliana, 2000. "Bank runs and currency run in a system without a safety net: Argentina and the 'tequila' shock," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 257-277, August.
    5. Saunders, Anthony & Wilson, Berry, 1996. "Contagious Bank Runs: Evidence from the 1929-1933 Period," Journal of Financial Intermediation, Elsevier, vol. 5(4), pages 409-423, October.
    6. 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.
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    Cited by:

    1. Cubillas, Elena & González, Francisco, 2014. "Financial liberalization and bank risk-taking: International evidence," Journal of Financial Stability, Elsevier, vol. 11(C), pages 32-48.
    2. Claudia M. Buch & Tobias Körner & Benjamin Weigert, 2015. "Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute," Credit and Capital Markets, Credit and Capital Markets, vol. 48(1), pages 11-49.
    3. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2014. "Institutional development and bank stability: Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 160-176.
    4. Raviv, Alon & Sisli-Ciamarra, Elif, 2013. "Executive compensation, risk taking and the state of the economy," Journal of Financial Stability, Elsevier, vol. 9(1), pages 55-68.
    5. Liu, Liuling & Zhang, Gaiyan & Fang, Yiwei, 2016. "Bank credit default swaps and deposit insurance around the world," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 339-363.


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