The Implicit Costs of Government Deposit Insurance

18 Pages Posted: 21 Feb 2015 Last revised: 3 Jun 2015

Thomas L. Hogan

Troy University

William J. Luther

Kenyon College

Date Written: February 19, 2015

Abstract

Most people believe the benefits of deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) clearly exceed the costs. However, a growing literature suggests the benefits of FDIC insurance are overstated while the costs are understated. We add to this literature by considering the implicit costs of FDIC. Specifically, we consider the costs arising from (1) an implicit taxpayer backstop and (2) suboptimal pricing. Since such costs are routinely omitted from traditional cost-benefit analysis, most studies of the FDIC tend to be biased in favor government-provided deposit insurance.

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

JEL Classification: E44, G28, G21

Suggested Citation

Hogan, Thomas L. and Luther, William J., The Implicit Costs of Government Deposit Insurance (February 19, 2015). Available at SSRN: https://ssrn.com/abstract=2567510 or http://dx.doi.org/10.2139/ssrn.2567510

Thomas L. Hogan (Contact Author)

Troy University ( email )

Troy, AL
United States

William J. Luther

Kenyon College ( email )

Gambier, OH 43022
United States

HOME PAGE: http://www.wluther.com

Paper statistics

Downloads
72
Rank
265,685
Abstract Views
636