Hidden costs of Federal Deposit Insurance

Everyone loves government-provided deposit insurance! Well, not everyone. But nearly everyone. It makes them feel secure knowing that, if their bank goes belly up, the Federal Deposit Insurance Corporation will swoop into action. What’s not to love about that? Co-blogger Thomas Hogan and I have argued that, contrary to standard models of deposit insurance, FDIC is costly. Some of these costs are explicit. Others, as we point out in our latest paper, are implicit. Here’s the abstract: Most people believe the benefits of deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) clearly exceed the costs. However, a growing literature suggests the benefits of FDIC insurance are overstated while the costs are understated. We add to this literature by considering the implicit costs of FDIC. Specifically, we consider the costs arising from (1) an implicit taxpayer backstop and (2) suboptimal pricing. Since such costs are routinely omitted from traditional cost-benefit analysis, most studies of the FDIC tend to be biased in favor government-provided deposit insurance. Before concluding that government-provided deposit insurances is a good deal, one should consider all of the costs and benefits relative to the relevant alternatives. We hope our latest paper pushes the conversation along in that direction.

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William J. Luther, PhD

William J. Luther is an Assistant Professor of Economics at Kenyon College and an Adjunct Scholar with the Cato Institute’s Center for Monetary and Financial Alternatives. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Public Choice, and Quarterly Review of Economics and Finance. His popular works have appeared in The Economist, Forbes, and U.S. News & World Report. He has been cited by major media outlets, including NPR, VICE News, Al Jazeera, The Christian Science Monitor, and New Scientist.

Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.