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Is Deposit Insurance a Good Thing, and if so, Who Should Pay for It?

Oxford Financial Research Centre Working Paper No. 2004-FE-08

EFA 2006 Zurich Meetings

27 Pages Posted: 30 Mar 2004  

Alan D. Morrison

University of Oxford - Said Business School; University of Oxford - Merton College

Lucy White

Centre for Economic Policy Research (CEPR); Boston University - Department of Finance & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2006

Abstract

Deposit insurance schemes are increasingly being adopted around the world and yet our understanding of their design and consequences is in its infancy. In this paper we provide a new rationale for the provision of deposit insurance based around the idea that bankers have valuable but costly monitoring skills. The banking sector exhibits both adverse selection and moral hazard and so the social benefits of bank monitoring are shared between depositors and their banks. Therefore too few deposits are made in equilibrium. Deposit insurance can correct this market failure. Contrary to received opinion, we find that deposit insurance should be funded not by bankers or depositors but through general taxation. We also show that the optimal level of deposit insurance should vary inversely with the quality of the banking system.

Keywords: deposit insurance, bank regulation, adverse selection, moral hazard

JEL Classification: G21, G28

Suggested Citation

Morrison, Alan D. and White, Lucy, Is Deposit Insurance a Good Thing, and if so, Who Should Pay for It? (June 2006). Oxford Financial Research Centre Working Paper No. 2004-FE-08; EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=521682 or http://dx.doi.org/10.2139/ssrn.521682

Alan Morrison (Contact Author)

University of Oxford - Said Business School ( email )

Department of Finance
Park End Street
Oxford OX1 1HP
United Kingdom
+44 18 6527 6343 (Phone)
+44 18 6527 6310 (Fax)

University of Oxford - Merton College

Merton Street
Oxford OX1 4JD
United Kingdom
+44 18 6527 6343 (Phone)

Lucy White

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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