Depositors' Welfare, Deposit Insurance, and Deregulation




    Search for more papers by this author
    • Kellogg Graduate School of Management, Northwestern University and School of Business Administration, University of Illinois at Chicago, respectively. We thank Tim Campbell, Vihang Errunza, Stuart Greenbaum, Rob Heinkel, Ravi Jagannathan, Patrick Lau, Etienne Losq, David Pyle, and Anjan Thakor for helpful comments. We are responsible for any remaining errors.


We develop an analytical model to address the question of optimal deposit insurance policy and to examine the impact of deregulation on depositors' welfare and the soundness of the insurance system. We find that the optimal level of regulation depends critically on the functional relationship between risk and return. We show that in general deregulation of bank activities and/or of deposit rate ceilings will in volve tradeoff between depositors' welfare and the soundness of the insurance system. Our analysis also indicates that risk-sensitive premium and capital requirement schedules may not be efficient in managing the risk of banks.