Deposit Insurance: Theories and Facts

44 Pages Posted: 28 Apr 2016

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Matthew Jaremski

Utah State University - Huntsman School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2016

Abstract

Economic theories posit that bank liability insurance is designed as serving the public interest by mitigating systemic risk in the banking system through liquidity risk reduction. Political theories see liability insurance as serving the private interests of banks, bank borrowers, and depositors, potentially at the expense of the public interest. Empirical evidence – both historical and contemporary – supports the private-interest approach as liability insurance generally has been associated with increases, rather than decreases, in systemic risk. Exceptions to this rule are rare, and reflect design features that prevent moral hazard and adverse selection. Prudential regulation of insured banks has generally not been a very effective tool in limiting the systemic risk increases associated with liability insurance. This likely reflects purposeful failures in regulation; if liability insurance is motivated by private interests, then there would be little point to removing the subsidies it creates through strict regulation. That same logic explains why more effective policies for addressing systemic risk are not employed in place of liability insurance. The politics of liability insurance also should not be construed narrowly to encompass only the vested interests of bankers. Indeed, in many countries, it has been installed as a pass-through subsidy targeted to particular classes of bank borrowers.

Keywords: Deposit Insurance; Political Economy; Mortgage Lending; Moral Hazard

JEL Classification: G21; G28; E44

Suggested Citation

Calomiris, Charles W. and Jaremski, Matthew, Deposit Insurance: Theories and Facts (April 2016). Columbia Business School Research Paper No. 16-35. Available at SSRN: https://ssrn.com/abstract=2771346 or http://dx.doi.org/10.2139/ssrn.2771346

Charles W. Calomiris

Columbia University - Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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Matthew Jaremski (Contact Author)

Utah State University - Huntsman School of Business ( email )

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Logan, UT 84322-3500
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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