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Funding deposit insurance

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  • Oosthuizen, Dick
  • Zalla, Ryan

Abstract

We present a quantitative model of deposit insurance. We characterize the policymaker’s optimal choices of coverage for depositors and premiums raised from banks. Premiums contribute to a deposit insurance fund that lowers taxpayers’ resolution cost of bank failures. We find that risk-adjusted premiums reduce moral hazard, enabling the policymaker to increase deposit insurance coverage by 3 percentage points and decrease the share of expected annual bank failures from 0.66% to 0.16%. The model predicts a fund-to-covered-deposits ratio that matches the data and declines in taxpayers’ income due to taxpayers’ risk aversion. JEL Classification: G21, G28

Suggested Citation

  • Oosthuizen, Dick & Zalla, Ryan, 2022. "Funding deposit insurance," Working Paper Series 2704, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222704
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    References listed on IDEAS

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    More about this item

    Keywords

    bank regulation; bank runs; deposit insurance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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