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Summer 2016
ISSN 0890-913X
Volume 31, Number 2

The Implicit Costs of Government Deposit Insurance

Thomas L. Hogan, Rice University
William J. Luther, Florida Atlantic Univeristy
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/index.php?action=ajax&rs=GDMgetPage&rsargs[]=2016 Journal of Private Enterprise vol 31 no 2 Summer parte1.pdf&rsargs[]=0
TheJournalofPrivateEnterprise31(2),2016,113TheImplicitCostsofGovernmentDepositInsurance*ThomasL.HoganTroyUniversityWilliamJ.LutherKenyonCollege______________________________________________________AbstractMostpeoplebelievethatthebenefitsofdepositinsuranceprovidedbytheFederalDepositInsuranceCorporation(FDIC)clearlyexceedthecosts.However,agrowingliteraturesuggeststhatthebenefitsofFDICinsuranceareoverstatedwhilethecostsareunderstated.Weaddtothisliteraturebyconsideringtheimplicitcostsofgovernment-provideddepositinsurance.Specifically,weconsiderthecostsarisingfrom(1)animplicittaxpayerbackstopand(2)suboptimalpricing.Theimplicitcostsofgovernmentprovideddepositinsurancearerealeconomiccostsbornebytaxpayers,borrowers,lenders,andcounterparties.Sincesuchcostsareroutinelyomittedfromtraditionalcost-benefitanalysis,moststudiesoftheFDICtendtobebiasedinfavorofgovernment-provideddepositinsurance.______________________________________________________JELCodes:E44,G28,G21Keywords:actuariallyfair,bankfailures,comparativeinstitutionalanalysis,depositinsurance,Diamond-Dybvigmodel,FDICI.IntroductionFewAmericansgivegovernment-provideddepositinsuranceasecondthoughtandvirtuallynoonecallsfortheabolitionoftheFederalDepositInsuranceCorporation(FDIC).TotheextentthattheFDICisconsideredatall,itispoliticallypopular.ItisoftencreditedwithpreventingbankrunslikethoseoftheGreatDepression,andCongresshasincreasedthemaximumaccountbalancecoveredbytheFDICseventimessinceitsfoundingin1933.Withannualadministrativeandoperatingexpensesaveragingjustafewcentsper$100insured,mostpeoplebelievethebenefitsofgovernment-provideddepositinsuranceexceedthecosts.*TheauthorsthanktheCatoInstituteandtheMercatusCenteratGeorgeMasonUniversityforgenerouslysupportingthisresearch.
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