Limited Deposit Insurance Coverage and Bank Competition

38 Pages Posted: 19 Jun 2014 Last revised: 20 Apr 2016

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Rune Stenbacka

Hanken School of Economics

Vladimir Yankov

Board of Governors of the Federal Reserve System

Multiple version iconThere are 5 versions of this paper

Date Written: April 19, 2016

Abstract

Deposit insurance designs in many countries place a limit on the coverage of deposits in each bank. However, no limits are placed on the number of accounts held with different banks. Therefore, under limited deposit insurance, some consumers open accounts with different banks to achieve higher or full deposit insurance coverage. We compare three regimes of deposit insurance: No deposit insurance, unlimited deposit insurance, and limited deposit insurance. We show that limited deposit insurance weakens competition among banks and reduces total welfare relative to no or unlimited deposit insurance.

Keywords: Limited deposit insurance coverage, deposit rates, bank competition, bailout cost.

JEL Classification: G21

Suggested Citation

Shy, Oz and Stenbacka, Rune and Yankov, Vladimir, Limited Deposit Insurance Coverage and Bank Competition (April 19, 2016). Available at SSRN: https://ssrn.com/abstract=2456083 or http://dx.doi.org/10.2139/ssrn.2456083

Oz Shy (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://www.frbatlanta.org/research/economists/shy-oz.aspx?panel=1

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

Vladimir Yankov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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