by Thomas L. Hogan, William J. Luther
February 24, 2014
Much analysis of government-provided deposit insurance evaluates a costless means of protecting depositors. Yet, as the case of the Federal Deposit Insurance Corporation (FDIC) illustrates, government deposit insurance is costly. Costs are incurred in assessing fees from banks, covering losses when banks fail, and monitoring the banking system. In this article, we review the performance of the FDIC and examine how the costs of federal deposit insurance have changed over time. We also used the FDIC experience as a benchmark against which potential alternatives might be compared. We find that deposit insurance in practice departs markedly from the ideal, costless system espoused by the Diamond-Dybvig model, which is often cited as a theoretical justification for government deposit insurance. As such, a meaningful analysis of deposit insurance must incorporate the costs of government-provided insurance.