Abstract
This paper argues that the staffs and explicit insurance reserves of U.S. deposit insurers have been overwhelmed by de facto financial disaster. The full costs of financing federal deposit insurance have become enormous and increasingly inequitable in distribution. To reduce voluntary risk-taking, authorities must reprice and redesign the system of de facto deposit-insurance coverage. Six complementary reforms are discussed: (1) accounting for institutional assets, liabilities, and net worth at market value, (2) enhancing opportunities for deposit insurers to manage their risk exposure, (3) recalibrating insurance coverages, (4) imposing risk-rated premiums, (5) mixed private and governmental competition in deposit insurance, and (6) constraining insurance-agency and Federal Reserve authority to bail out insolvent institutions.
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