Title

The Implicit Costs of Government Deposit Insurance

Document Type

Article

Publication Date

Summer 2016

Abstract

Most people believe that the benefits of deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) clearly exceed the costs. However, a growing literature suggests that the benefits of FDIC insurance are overstated while the costs are understated. We add to this literature by considering the implicit costs of government-provided deposit insurance. Specifically, we consider the costs arising from (1) an implicit taxpayer backstop and (2) suboptimal pricing. The implicit costs of government-provided deposit insurance are real economic costs borne by taxpayers, borrowers, lenders, and counterparties. Since such costs are routinely omitted from traditional cost-benefit analysis, most studies of the FDIC tend to be biased in favor of government-provided deposit insurance.

Journal

Journal of Private Enterprise

Volume

31

Issue

2

First Page

1

Last Page

13