Abstract

http://ssrn.com/abstract=2083662
 
 

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The Explicit Costs of Government Deposit Insurance


Thomas L. Hogan


Troy University

William J. Luther


Kenyon College

August 31, 2013

Cato Journal, Vol. 34 (1) pp.145-170, Winter 2014

Abstract:     
The Diamond–Dybvig model is often cited as a theoretical justification for government-provided deposit insurance. Guaranteeing bank deposits removes the temptation for individual depositors to run on the bank and thereby precludes the need to ever use the deposit insurance. Hence, deposit insurance provides a costless solution to the threat of bank runs. In practice, however, government-provided deposit insurance is not a costless solution as it is frequently invoked to cover the losses of failed banks. We maintain that potential alternatives to government deposit insurance should be compared to the current system rather than to a theoretically optimal system of insurance. Focusing on the FDIC, we consider the differences between deposit insurance in theory and practice, review how the explicit cost of providing deposit insurance has changed over time, and consider implicit costs from taxpayer backing and suboptimal assessment rates.

Number of Pages in PDF File: 26

Keywords: Actuarially fair, Bank failures, Comparative Institutional Analysis, Deposit insurance, Diamond-Dybvig, FDIC

JEL Classification: E44, G28, G21

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Date posted: June 13, 2012 ; Last revised: April 12, 2014

Suggested Citation

Hogan, Thomas L. and Luther, William J., The Explicit Costs of Government Deposit Insurance (August 31, 2013). Cato Journal, Vol. 34 (1) pp.145-170, Winter 2014. Available at SSRN: http://ssrn.com/abstract=2083662 or http://dx.doi.org/10.2139/ssrn.2083662

Contact Information

Thomas L. Hogan
Troy University ( email )
Troy, AL
United States
William J. Luther (Contact Author)
Kenyon College ( email )
Gambier, OH 43022
United States
HOME PAGE: http://www.wluther.com
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