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Is Deposit Insurance a Good Thing, and If So, Who Should Pay for It?

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  • Alan D. Morrison
  • Lucy White

Abstract

Deposit insurance schemes are becoming increasingly popular around the world and yet there is little understanding of how they should be designed and what their consequences are. In this paper we provide a new rationale for the provision of deposit insurance. We analyse a model in which agents choose between depositing their funds with banks and placing them in a less productive self-managed project. Bankers have valuable but costly project management skills and the banking sector exhibits both adverse selection and moral hazard. Depositors do not fully account for the social benefits accruing from bank management of projects and so too few deposits are made in equilibrium. The regulator can correct this market failure by providing deposit insurance to encourage deposits. Contrary to received opinion, we find that deposit insurance should be funded not by bankers or depositors but through general taxation.

Suggested Citation

  • Alan D. Morrison & Lucy White, 2004. "Is Deposit Insurance a Good Thing, and If So, Who Should Pay for It?," OFRC Working Papers Series 2004fe08, Oxford Financial Research Centre.
  • Handle: RePEc:sbs:wpsefe:2004fe08
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2004fe08.pdf
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    Cited by:

    1. Morrison, Alan & White, Lucy, 2005. "Level Playing Fields in International Financial Regulation," CEPR Discussion Papers 5247, C.E.P.R. Discussion Papers.
    2. Morrison, Alan D. & White, Lucy, 2010. "Reputational contagion and optimal regulatory forbearance," Working Paper Series 1196, European Central Bank.
    3. Franklin Allen & Elena Carletti & Robert Marquez, 2011. "Credit Market Competition and Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 983-1018.
    4. Arping, Stefan, 2010. "The pricing of bank debt guarantees," Economics Letters, Elsevier, vol. 108(2), pages 119-121, August.
    5. Morrison, Alan D. & White, Lucy, 2013. "Reputational contagion and optimal regulatory forbearance," Journal of Financial Economics, Elsevier, vol. 110(3), pages 642-658.
    6. Veronika Holá & Petr Jakubík, 2011. "Evropské systémy pojištění vkladů: důsledky změn z roku 2008
      [Impact of Parametric Changes in Deposit Insurance Schemes in 2008]
      ," Politická ekonomie, University of Economics, Prague, vol. 2011(5), pages 659-679.
    7. Claeys, Sophie, 2005. "Optimal regulatory design for the Central Bank of Russia," BOFIT Discussion Papers 7/2005, Bank of Finland, Institute for Economies in Transition.
    8. Franklin Allen & Elena Carletti & Agnese Leonello, 2011. "Deposit insurance and risk taking," Oxford Review of Economic Policy, Oxford University Press, vol. 27(3), pages 464-478.
    9. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics 662, University of Munich, Department of Economics.
    10. Morrison, Alan & White, Lucy, 2013. "Reputational Contagion and Optimal Regulatory Forbearance," CEPR Discussion Papers 9508, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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