Did the Introduction of Fixed-Rate Federal Deposit Insurance Increase Bank Risk?

29 Pages Posted: 21 Apr 2006

See all articles by Gayle L. DeLong

Gayle L. DeLong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Anthony Saunders

New York University - Leonard N. Stern School of Business

Date Written: April 17, 2006

Abstract

We investigate whether the introduction of fixed-price U.S. federal deposit insurance increased the risk-taking of banks. We examine 70 financial institutions and find that banks in general became more risky after the introduction of deposit insurance. However, a subset of well-performing banks reduced their risk. Deposit insurance brought about stability in that depositors returned to weaker banks. Although investors did not see deposit insurance as a net subsidy to the banking industry, investors believed deposit insurance would allow smaller banks to compete better against bigger banks. While deposit insurance allowed greater risk-taking among some banks, it also brought more stability and competition within the banking industry.

Keywords: Banks, Government Policy and Regulation

JEL Classification: G21, G28

Suggested Citation

DeLong, Gayle L. and Saunders, Anthony, Did the Introduction of Fixed-Rate Federal Deposit Insurance Increase Bank Risk? (April 17, 2006). Available at SSRN: https://ssrn.com/abstract=897319 or http://dx.doi.org/10.2139/ssrn.897319

Gayle L. DeLong (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

One Bernard Baruch Way
Box B 10-225
New York, NY 10010
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646-312-3493 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://faculty.baruch.cuny.edu/gdelong

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

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