Deposit Insurance Is Not Fair

Harwood Economic Review, Winter: 6-7

3 Pages Posted: 11 Mar 2015 Last revised: 30 Aug 2018

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: December 1, 2017

Abstract

Most depositors love the security offered by the Federal Deposit Insurance Corporation (FDIC), but few realize the true costs of deposit insurance. Since government deposit insurance is not priced at “actuarially fair” rates, it raises the costs of insurance for depositors and encourages excessive risk in the financial system. We review the theoretical argument for actuarially fair rates and compare the actual rates assessed under the FDIC to an estimate of the fairest rate that could be provided by the FDIC. We conclude that the deposit insurance offered by FDIC is not fair. Indeed, historical rates deviated from the ideal by more than $0.03 per $100 insured on average. Considering that the average annual assessment rate is less than $0.07, the observed deviations tend to be quite large. We discuss how this policy increases bank risk and propose that, if policymakers insist on providing deposit insurance, they should find a more appropriate way to price it.

Keywords: Actuarially fair, Bank failures, Deposit insurance

JEL Classification: E44, G28, G21

Suggested Citation

Hogan, Thomas L. and Luther, William J., Deposit Insurance Is Not Fair (December 1, 2017). Harwood Economic Review, Winter: 6-7. Available at SSRN: https://ssrn.com/abstract=2576461 or http://dx.doi.org/10.2139/ssrn.2576461

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

Register to save articles to
your library

Register

Paper statistics

Downloads
55
rank
349,598
Abstract Views
395
PlumX