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Equity, Efficiency, and Mispriced Deposit Guarantees

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Federal deposit insurance is supposed to protect savers and to help stabilize our banking system. However, if the deposit guarantees are mispriced, federal deposit insurance has unintended effects that are undesirable. In this Economic Commentary, we examine the factors that determine the value of deposit insurance. We show how insured banks can increase the value of their insurance and discuss their incentives to do so.

Federal deposit insurance is supposed to protect savers and to help stabilize our banking system. However, if the deposit guarantees are mispriced, federal deposit insurance has unintended effects that are undesirable.

In this Economic Commentary, we examine the factors that determine the value of deposit insurance. We show how insured banks can increase the value of their insurance and discuss their incentives to do so.


Suggested citation: Thomson, James B., 1986. "Equity, Efficiency, and Mispriced Deposit Guarantees," Federal Reserve Bank of Cleveland, Economic Commentary, 07.15.1986.

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