Policy Documents

Deposit Insurance Is Not Free

William J. Luther and Thomas L. Hogan –
December 12, 2012

Government-provided deposit insurance is not free. The reason is straightforward: Government-provided deposit insurance in practice differs significantly from that proposed in theory. First, the FDIC must expend real resources administering and operating the Deposit Insurance Fund. Second, the FDIC is committed to bailing out depositors whenever a bank goes bust regardless of whether the failure was the result of a bank run. Economists and policymakers would do well to keep these factors in mind when considering the costs and benefits of government-provided deposit insurance.