Alternatives to FDIC Deposit Insurance

Abstract

This paper considers potential alternatives to the Federal Deposit Insurance Corporation (FDIC) system of deposit insurance in the United States. We review the international and historical literature on deposit insurance which finds higher government involvement in the deposit insurance system increases the likelihood of bank failures and financial crises. We discuss three potential changes to the FDIC system. First, deposit insurance could be government mandated but privately administered as is done in most developed countries. Second, coverage levels could be lowered and supplemented by currently available private issuers. Third, the mandate on deposit insurance could be lifted and the supply of insurance privatized. Empirical evidence indicates these changes would reduce bank failures and financial crises.