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Bank Capital and Deposit Insurance

Author

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  • Kaniska Dam

  • Rajdeep Sengupta

Abstract

This paper examines the relationship between bank capital and reliance on insured deposit funding. Contrary to the conventional moral-hazard view underlying risk-based capital regulation, U.S. bank data reveal a robust negative association between capital and the share of insured deposits. We develop a delegated-monitoring model in which banks choose between insured and uninsured deposit financing. Although monitoring increases with capital under both funding regimes, its sensitivity to capital is greater when deposits are uninsured, strengthening the relative attractiveness of uninsured funding for well-capitalized banks. Our contribution is to show that the relationship between bank capital and deposit insurance depends not only on the direct effect of capital on risk-taking, but also on how capitalization changes a bank’s incentives to monitor under different funding arrangements.

Suggested Citation

  • Kaniska Dam & Rajdeep Sengupta, 2026. "Bank Capital and Deposit Insurance," Research Working Paper RWP 26-11, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:103726
    DOI: 10.18651/RWP2026-11
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    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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