Limited Deposit Insurance Coverage and Bank Competition
38 Pages Posted: 19 Jun 2014 Last revised: 20 Apr 2016
Date Written: April 19, 2016
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: Suggested Citation