Abstract
Most depositors love the security offered by the Federal Deposit Insurance Corporation (FDIC), but few realize the true costs of deposit insurance. Since government deposit insurance is not priced at “actuarially fair” rates, it raises the costs of insurance for depositors and encourages excessive risk in the financial system. We review the theoretical argument for actuarially fair rates and compare the actual rates assessed under the FDIC to an estimate of the fairest rate that could be provided by the FDIC. We conclude that the deposit insurance offered by FDIC is not fair. Indeed, historical rates deviated from the ideal by more than $0.03 per $100 insured on average. Considering that the average annual assessment rate is less than $0.07, the observed deviations tend to be quite large. We discuss how this policy increases bank risk and propose that, if policymakers insist on providing deposit insurance, they should find a more appropriate way to price it.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
