The Implicit Costs of Government Deposit Insurance

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

See all articles by Thomas L. Hogan

Thomas L. Hogan

Rice University - Baker Institute for Public Policy

William J. Luther

Florida Atlantic University; American Institute for Economic Research

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)

Rice University - Baker Institute for Public Policy ( email )

6100 Main Street, MS-40
Houston, TX 77005
United States

William J. Luther

Florida Atlantic University ( email )

777 Glades Road
Boca Raton, FL 33431
United States

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

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

HOME PAGE: http://www.aier.org/staff/william-j-luther

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