Markets · 6 pages · 12 min
How deposit insurance changes behavior
Deposit insurance pays covered depositors if a bank fails, which changes what those depositors watch.
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From the opening
Deposit insurance is a promise, usually from a public scheme, that covered depositors will be paid up to a stated cap if the bank cannot pay them. The promise changes behavior because the insured depositor no longer bears the full loss of a failure, so the reason to monitor the bank or to flee at the first rumor is weaker. The opening covers covered balances dull monitoring, uninsured creditors can still run, and lending can slip the discipline.
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Inside
- Covered balances dull monitoring
- Uninsured creditors can still run
- Lending can slip the discipline
- A cap is not every creditor
- Where the idea stops applying
- A distinction worth keeping
Sources
- Deposit insurance moral hazard
- Coverage caps on deposit guarantees