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| Title: | | Reforming deposit insurance: The case to replace FDIC protection with self-insurance  |
| Authors: | | Konstas, Panos |
| Issue Date: | | 2006 |
| Series/Report no.: | | Public policy brief // Jerome Levy Economics Institute of Bard College 83 |
| Abstract: | | The Federal Deposit Insurance Corporation (FDIC) currently insures bank deposit balances up to $100,000. According to some observers, statutory protection creates moral hazard problems for insurers because it allows banks to engage in risky activities. As an example, moral hazard was a key contributor to huge losses suffered when thrift institutions failed during the 1980s. This brief by Panos Konstas outlines a plan to reduce the risk of government losses by replacing insured deposits with uninsured deposits and eliminating some of the costs of deposit insurance. His plan proposes a self-insured (SI) depositor system that places an intermediary between the lender (saver) and borrower (bank) in the credit-flow chain. The FDIC would guarantee saver loans and allow the intermediary to borrow at the risk-free interest rate if the intermediary's bank deposit is statutorily defined outside the realm of FDIC insurance. The risk is therefore transferred to depositors (intermediaries); thus creating incentives for depositors to earn a rate of return at least equal to the cost of borrowing plus a risk premium based on the risk profile of banks. |
| ISBN: | | 1931493480 |
| Document Type: | | Research Report |
| Appears in Collections: | | Public Policy Briefs, Levy Economics Institute of Bard College
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