Deposit Insurance and Reinsurance: A General Equilibrium Perspective

54 Pages Posted: 4 Apr 2017

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Hans H. Haller

Virginia Polytechnic Institute & State University - Department of Economics

Volker Britz

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: March 2017

Abstract

We study the consequences and optimal design of bank deposit insurance and reinsurance in a general equilibrium setting. The model involves two production sectors. One sector is financed by issuing bonds to risk-averse households. Firms in the other sector are monitored and financed by banks. Households fund banks through deposits and equity. Deposits are explicitly insured by a deposit insurance fund. Any remaining shortfall is implicitly guaranteed by the government. The deposit insurance fund charges banks a premium per unit of deposits whereas the government finances any necessary bail-outs by lump-sum taxation of households. When the deposit insurance premium is actuarially fair or higher than actuarially fair, two types of equilibria emerge: One type of equilibria supports the Pareto optimal allocation, and the other type does not. In the latter case, bank lending is too large relative to equity and the probability that the banking system collapses is positive. Next, we show that a judicious combination of deposit insurance and reinsurance eliminates all non-optimal equilibrium allocations. Our paper provides a benchmark result for policy proposals that advocate deposit insurance cum reinsurance.

Keywords: Capital Structure, deposit insurance, Financial Intermediation, General Equilibrium, reinsurance

JEL Classification: D53, E44, G2

Suggested Citation

Gersbach, Hans and Haller, Hans H. and Britz, Volker, Deposit Insurance and Reinsurance: A General Equilibrium Perspective (March 2017). CEPR Discussion Paper No. DP11947, Available at SSRN: https://ssrn.com/abstract=2945362

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Research ( email )

Zürichbergstrasse 18
Zurich, 8092
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+41 44 632 82 80 (Phone)
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IZA Institute of Labor Economics

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Centre for Economic Policy Research (CEPR)

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United Kingdom

Hans H. Haller

Virginia Polytechnic Institute & State University - Department of Economics ( email )

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Blacksburg, VA 24061
United States
540-231-7591 (Phone)
540-231-5097 (Fax)

Volker Britz

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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