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A guide to deposit insurance reform

Listed author(s):
  • Antoine Martin

Deposit insurance was introduced in the United States during the Great Depression primarily to promote financial stability. Stability is enhanced because deposit insurance reduces the likelihood of a bank run. During its first four decades, deposit insurance appeared to work well as few banks failed. But in the 1980s, a wave of financial troubles in the banking and thrift industry exposed an unfortunate side of deposit insurance-moral hazard. In other words, deposit insurance encouraged undercapitalized depository institutions to take excessive risk. The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, was designed to prevent moral hazard, which many observers claim was a major cause of the 1980s crisis. ; Today's banking system is not in crisis. In fact, most banks are doing well. Still, both houses of Congress are debating new ways to reform deposit insurance. The view of many in the banking industry is that currently deposit insurance has a number of flaws. ; Martin provides a guide to key issues in the current deposit insurance debate. He gives a brief history of deposit insurance, exploring the roots of the problems that concern the industry today. Next, he provides an overview of the current reform proposals as they relate to three issues: the size of the fund, the structure of insurance premiums and rebates, and insurance coverage.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2003)
Issue (Month): Q I ()
Pages: 29-54

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Handle: RePEc:fip:fedker:y:2003:i:qi:p:29-54:n:v.88no.1
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  1. Robert A. Eisenbeis & Larry D. Wall, 2002. "Reforming deposit insurance and FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-16.
  2. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
  3. repec:aei:rpbook:52719 is not listed on IDEAS
  4. George J. Benston & George G. Kaufman, 1997. "FDICIA after Five Years," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 139-158, Summer.
  5. Edward Simpson Prescott, 2002. "Can risk-based deposit insurance premiums control moral hazard?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 87-100.
  6. John H. Boyd & Arthur J. Rolnick, 1988. "A case for reforming federal deposit insurance," Annual Report, Federal Reserve Bank of Minneapolis.
  7. Alan Greenspan, 2002. "Federal deposit insurance reform: testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 23, 2002," Speech 8, Board of Governors of the Federal Reserve System (U.S.).
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