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Deposit Insurance Reform: Is It Déjà Vu All Over Again?

Deposit Insurance Reform: Is It Déjà Vu All Over Again?

In "Deposit Insurance Reform: Is It Déjà Vu All Over Again?," Mark D. Vaughan and David C. Wheelock evaluate a proposed increase in the ceiling on deposit insurance coverage from the current level of $100,000 per account to $130,000 per account. The authors review the rationale for deposit insurance, moral hazard and adverse selection problems insurance creates, performance of early 20th century state deposit insurance programs, and the S&L crisis of the 1980s and conclude that raising the ceiling is an unwise proposition.

What is the rationale for deposit insurance?
Using marginal analysis, explain how bankers decide how much risk to take. How is this decision influenced by the availability of deposit insurance? How is it affected by the amount of a bank’s net worth?
Why did the eight state deposit insurance systems created in the early 20th century fail?
When the federal deposit insurance system was created in the 1930s, what provisions were included to overcome adverse selection and moral hazard problems?
Why do community bankers favor raising the deposit insurance coverage ceiling?
Why do the authors of this reading oppose raising the coverage ceiling? Do you agree with them? Why?

Source: “Deposit Insurance Reform: Is It Déjà Vu All Over Again?” Mark D. Vaughan and David C. Wheelock, Federal Reserve Bank of St. Louis The Regional Economist, October 2002, pp. 4-9.

Pearson

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