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BANK FAILURES: THE DEPOSIT INSURANCE CONNECTION
Author(s) -
O'DRISCOLL GERALD P.
Publication year - 1988
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.1988.tb00282.x
Subject(s) - deposit insurance , moral hazard , argument (complex analysis) , economics , bank failure , business , insurance policy , actuarial science , monetary economics , financial system , finance , market economy , incentive , biochemistry , chemistry
It is generally accepted that banks must be regulated so as to avoid the moral hazard situation that deposit insurance generates. Accepting this argument implies that expanded bank powers must await deposit insurance reform. This article rejects the accepted view and argues instead that the existing regulatory system enhances rather than diminishes the riskiness of banks' portfolios. The article argues that the benefits from permitting banks to diversify probably would outweigh the costs. It concludes, however, that deposit insurance is a major culprit in the current wave of bank failures.