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Summer 2016

ISSN 0890-913X

Volume 31, Number 2

Categories: Summer 2016 | Insurance | Government

The Implicit Costs of Government Deposit Insurance

Thomas L. Hogan, Rice University

William J. Luther, Florida Atlantic Univeristy

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TheJournalofPrivateEnterprise31(2),2016,1–13TheImplicitCostsofGovernmentDepositInsurance*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-provideddepositinsuranceasecondthought—andvirtuallynoonecallsfortheabolitionoftheFederalDepositInsuranceCorporation(FDIC).TotheextentthattheFDICisconsideredatall,itispoliticallypopular.ItisoftencreditedwithpreventingbankrunslikethoseoftheGreatDepression,andCongresshasincreasedthemaximumaccountbalancecoveredbytheFDICseventimessinceitsfoundingin1933.Withannualadministrativeandoperatingexpensesaveragingjustafewcentsper$100insured,mostpeoplebelievethebenefitsofgovernment-provideddepositinsuranceexceedthecosts.*TheauthorsthanktheCatoInstituteandtheMercatusCenteratGeorgeMasonUniversityforgenerouslysupportingthisresearch.

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Title	The Implicit Costs of Government Deposit Insurance
Authors/Creators:	Thomas L. Hogan, Rice University William J. Luther, Florida Atlantic Univeristy
Year:	2016
Volume:	31
Number:	2
Pages:	1 - 13
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	actuarially fair, bank failures, comparative institutional analysis, deposit insurance, Diamond-Dybvig model, FDIC

Citation:
Hogan, Thomas L.; Luther, William J. / 2016. "The Implicit Costs of Government Deposit Insurance." The Journal of Private Enterprise, 31(2): 1-13.