Abstract
The thrust of current deposit insurance reform--risk-based insurance premiums and capital requirements--is an effort to price deposit insurance more fairly. Fairly pricing deposit insurance eliminates inequitable wealth transfers, but it does not lead to an efficient equilibrium. This paper shows that an alternative charter policy results in an efficient separating equilibrium. The analysis in this paper provides support for the deposit insurance reform proposal in the recent (1993) National Commission on Financial Institution Reform, Recovery and Enforcement (NCFIRRE) report to the President and Congress, and for Merton and Bodie's (1993) proposal.
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