Abstract
This study empirically examines the impact of federal deposit insurance coverage on the failure rate of commercial banks in the U.S. over the 1963–91 period. The analysis allows for the potential bank failure rate impact of the growth rate of real GDP, the real prime lending rate, the real cost of funds, and the commercial bank tangible capital-to-asset ratio, while measuring federal deposit insurance coverage as the percentage of deposits at federally insured banks that was covered by federal deposit insurance. The instrumental variables' estimates indicate that the greater the extent of federal deposit insurance coverage, the higher the bank failure rate.
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