Skip to main content

Financial Stability and FDIC Insurance

  • Chapter
The Financial Services Revolution

Abstract

The Federal Deposit Insurance Corporation (FDIC) was created over five decades ago to increase the stability of the banking system. Questions of how and whether the FDIC enhances stability or welfare are now being raised in the economic literature. Buser et al. (1981) argue that deposit insurance has been deliberately under-priced so that the FDIC’s package deal, which includes both insurance and regulation, will be attractive to banks. These authors identify a deadweight loss associated with this particular incentive structure. Campbell and Glenn (1984) discuss the determinants of the optimal policies regarding deposit-insurance pricing and bank closings. They show that appropriate policy depends in an important way on the nature of the mechanism for determining insolvency. Chan and Mak (1984) show that, given some exogenously determined constraint on the bank-failure rate, a risk-sensitive premium for deposit insurance may be ill-advised. These authors focus their analysis on the trade-off between depositors’ welfare and the soundness of the insurance system.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 39.99
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 54.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Similar content being viewed by others

References

  • Benston, George J., et al. Perspectives on Safe and Sound Banking: Past, Present, and Future. Cambridge, Mass.: MIT Press, 1986.

    Google Scholar 

  • Buser, Stephen A., Chen, Andrew H., and Kane, Edward J. “Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital.” The Journal of Finance (March 1981): 51–60.

    Google Scholar 

  • Campbell, Tim S., and Glenn, David. “Deposit Insurance in a Deregulated Environment.” The Journal of Finance (July 1984): 775–87.

    Google Scholar 

  • Chan, Yuk-Shee, and Mak, King-Tim. “Depositors’ Welfare, Deposit Insurance, and Deregulation.” Paper presented at the American Finance Association meetings, December 1984

    Google Scholar 

  • FDIC. Deposit Insurance in a Changing Environment: A Study of the Current System of Deposit Insurance. Washington, D.C.: FDIC, April 1983.

    Google Scholar 

  • Gilbert, Alton, and Wood, Geoffrey E. “Coping with Bank Failures: Some Lessons from the United States and the United Kingdom.” Federal Reserve Bank of St. Louis Review (December 1986): 5–14.

    Google Scholar 

  • Kane, Edward J. “A Six-Point Program for Deposit-Insurance Reform.” Housing Finance Review (July 1983): 269–78.

    Google Scholar 

  • Kane, Edward J. The Gathering Crisis in Federal Deposit Insurance. Cambridge, Mass.: MIT Press, 1985.

    Google Scholar 

  • Kareken, John A. “Deregulating Commercial Banks: The Watchword Should Be Caution.” Federal Reserve Bank of Minneapolis Quarterly Review (Spring/Summer 1981): 1–5.

    Google Scholar 

  • Kareken, John A. “The First Step in Bank Deregulation: What About the FDIC?” American Economic Review (May 1983): 198–203.

    Google Scholar 

  • Kareken, John A., and Wallace, Neil. “Deposit Insurance and Bank Regulation: A Partial Equilibrium Exposition.” Journal of Business (July 1978): 413–52.

    Google Scholar 

  • Keeton, William R. “Deposit Insurance and Deregulation.” Unpublished manuscript, Federal Reserve Bank of Kansas City, September 1985.

    Google Scholar 

  • Klein, Benjamin. “Competitive Interest Payments on Bank Deposits and the Long-run Demand for Money.”American Economic Review (December 1974): 931–49.

    Google Scholar 

  • Peltzman, Sam. “Entry in Commercial Banking.” Journal of Law and Economics (October 1963): 11–50.

    Google Scholar 

  • Short, Eugenie D. “FDIC Settlement Practices and the Size of Failed Banks.” Federal Reserve Bank of Dallas Economic Review (March 1985): 12–20.

    Google Scholar 

  • Short, Eugenie D., and O’Driscoll, Gerald P., Jr. “Deregulation and Deposit Insurance.” Federal Reserve Bank of Dallas Economic Review (September 1983): 11–22.

    Google Scholar 

  • Short, Eugenie D., O’Driscoll, Gerald P., Jr., and Berger, Franklin D. “Recent Bank Failures: Determinants and Consequences.” Proceedings of a Conference on Bank Structure and Competition, Federal Reserve Bank of Chicago, May 1985, pp. 150–65.

    Google Scholar 

  • Wall, Larry D. “Will Capital Adequacy Requirements Slow the Development of Interstate Banking?” Federal Reserve Bank of Atlanta Economic Review (May 1983): 46–54.

    Google Scholar 

  • Wells, Don R., and Scruggs, L. S. “Financial Deregulation, Deposit Insurance, Branch Banking and Free Banking: The Historical Implications.” Paper presented at the Atlantic Economic Society meetings, October 1984.

    Google Scholar 

  • White, Lawrence H. Free Banking in Britain: Theory, History and Debate. Cambridge: Cambridge University Press, 1984.

    Google Scholar 

Download references

Authors

Editor information

Catherine England Thomas Huertas

Rights and permissions

Reprints and permissions

Copyright information

© 1988 The Casto Institute

About this chapter

Cite this chapter

Garrison, R.W., Short, E.D., O’Driscoll, G.P. (1988). Financial Stability and FDIC Insurance. In: England, C., Huertas, T. (eds) The Financial Services Revolution. Innovations in Financial Markets and Institutions, vol 1. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-3277-7_10

Download citation

  • DOI: https://doi.org/10.1007/978-94-009-3277-7_10

  • Publisher Name: Springer, Dordrecht

  • Print ISBN: 978-94-010-7971-6

  • Online ISBN: 978-94-009-3277-7

  • eBook Packages: Springer Book Archive

Publish with us

Policies and ethics