IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Deposit insurance: a reconsideration

  • John H. Boyd
  • Chun Chang
  • Bruce D. Smith

This paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs, the way in which they are priced and the way in which they fund revenue shortfalls. We show that the central issue is how the government will make up any FDIC losses. Under one scheme for making up the losses, we show that FDIC policy is irrelevant: it does not matter what premium is charged, nor does it matter how big FDIC losses are. Under another scheme, all that matters is the magnitude of the losses. And there is no presumption that small losses are “good.” We also show that multiple equilibria can be observed and Pareto ranked. Some economies may be “trapped” in equilibria with inefficient financial systems. Our analysis provides counterexamples to the following propositions. (1) Actuarially fair pricing of deposit insurance is always desirable. (2) Implicit FDIC subsidization of banks through deposit insurance is always undesirable. (3) “Large” FDIC losses are necessarily symptomatic of a poorly designed deposit insurance system.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=759
Download Restriction: no

File URL: http://www.minneapolisfed.org/research/wp/wp593.pdf
Download Restriction: no

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 593.

as
in new window

Length:
Date of creation: 1998
Date of revision:
Handle: RePEc:fip:fedmwp:593
Contact details of provider: Postal: 90 Hennepin Avenue, P.O. Box 291, Minneapolis, MN 55480-0291
Phone: (612) 204-5000
Web page: http://minneapolisfed.org/

More information through EDIRC

Order Information: Web: http://www.minneapolisfed.org/pubs/ Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  2. Santos, Joao A. C., 1999. "Bank capital and equity investment regulations," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1095-1120, July.
  3. Gertler, M.L. & Hubbard, R.G., 1988. "Financial Factors In Business Fluctuations," Papers fb-_88-37, Columbia - Graduate School of Business.
  4. Boyd, John H & Chang, Chun & Smith, Bruce D, 1998. "Moral Hazard under Commercial and Universal Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 426-68, August.
  5. Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992. " Is Fairly Priced Deposit Insurance Possible?," Journal of Finance, American Finance Association, vol. 47(1), pages 227-45, March.
  6. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
  7. Bencivenga, Valerie R & Smith, Bruce D & Starr, Ross M, 1996. "Liquidity of Secondary Capital Markets: Allocative Efficiency and the Maturity Composition of the Capital Stock," Economic Theory, Springer, vol. 7(1), pages 19-50, January.
  8. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  9. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  10. G.B. Gorton & J.G. Haubrich, . "Bank Deregulation, Credit Markets and the Control of Capital," Rodney L. White Center for Financial Research Working Papers 08-86, Wharton School Rodney L. White Center for Financial Research.
  11. George A. Akerlof & Paul M. Romer, 1993. "Looting: The Economic Underworld of Bankruptcy for Profit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 1-74.
  12. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  13. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  14. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-38, July.
  15. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  16. Boyd, John H & Smith, Bruce D, 1994. "How Good Are Standard Debt Contracts? Stochastic versus Nonstochastic Monitoring in a Costly State Verification Environment," The Journal of Business, University of Chicago Press, vol. 67(4), pages 539-61, October.
  17. Berlin, Mitchell & John, Kose & Saunders, Anthony, 1996. "Bank Equity Stakes in Borrowing Firms and Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 889-919.
  18. Williamson, Stephen D, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 135-45, February.
  19. George J. Mailath & Loretta J. Mester, 1993. "A positive analysis of bank closure," Working Papers 94-2, Federal Reserve Bank of Philadelphia.
  20. John, Kose & John, Teresa A. & Saunders, Anthony, 1994. "Universal banking and firm risk-taking," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 307-323, January.
  21. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  22. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  23. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedmwp:593. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Janelle Ruswick)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.