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Deposit Insurance

In theory a higher ceiling implies greater prevention accompanied with an increase in moral hazard. The tradeoff means that raising the deposit insurance ceiling to create more confidence induces bank managers to take on greater risks. Because of this, the FDIC must continually set up incentive compatible insurance structures. Other tasks of the FDIC include bank supervision and monitoring with respect to the regulatory dialect and resolution or liquidation of failed banks. FDIC failure prevention policies and procedures are subject to several criterions. These criterions include the FDIC's treatment of insured depositor's verses uninsured depositor's keeping the confidence of the people in the banking system, and choosing methods that ensure market discipline. Taking this into account, the FDIC currently uses two methods for liquidating failed banks. Under a purchase and assumption transaction the FDIC will auction off a failing institution to a healthy one to restore stability in the banking industry. When this is not possible the FDIC will just use a deposit payoff to reimburse insured depositors.
             Originally, deposit insurance was financed though a flat-rate premium. This premium structure meant that all banks paid the same premium for FDIC coverage regardless of the risk it brought to the fund. Theoretically, this type of structure would give rise to moral hazard increasing the chance of bank failures. Since weak banks pay the same premium as healthy banks the have more incentive to make risky investments to increase profit. This was not really a problem though until the 1980's. Before the Depository Institution's Deregulation and Monetary Control Act of 1980, banks were heavily regulated in the activities they could engage in. For example, Regulation Q put interest-rate ceilings on many deposits and banks also had portfolio restrictions prohibiting them from holding securities.


Essays Related to Deposit Insurance

1. The New Deal Used Today

As a result of the depression, many banks had to shut their doors and were unable to return the deposited money from its customers. The Federal Deposit Insurance Corporation was designed to encourage the public confidence in banks, and to provide insurance coverage for all deposits. ... Social insurance refers to government programs that benefit the people whom have earned the right to those benefits through work. The Social Securities Act of 1935 provided old age insurance which was financed by both the previous employee and the employer. ... The Federal Deposit Insurance Corporation, the Soc...

  • Word Count: 661
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2. Banking

Have larger % gaps than banks Origins of the thrift and banking problems in recent past are due to mismanagement of interest rate, credit risks, deposits insurance, legislative and political causes. ... Ex. 15%*10%equity ratio Financial services Modernization act led to interstate banking in the US Deposit insurance reduces bank runs, helped cause the insolvency of the FSLIC, induced moral hazard at DIs Term life insurance policy does not have a savings feature, Whole life, Variable life, and universal life do Interest on annuities is not taxed until the investor receives the payments ...

  • Word Count: 1446
  • Approx Pages: 6
  • Grade Level: Undergraduate

3. The New Deal

New Deal plans such as; the Agriculture Adjustment Administration, the Federal Deposit Insurance Corporation, and the Social Security Administration helped the economy recover and got many Americans lives back to normal. ... The glass-Steagall banking act created the Federal Deposit Insurance Corporation which insured individual bank deposits up to $2500. ... Now the government had a plan for social insurance called the Social Security Act of 1935 which created a system of social insurance directed at several specifically designed categories of people. This created retirement plans, bene...

  • Word Count: 529
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4. Regulation in the Banking Business and Its Effects

The main regulatory agencies at the federal level are the Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corporation. ... The Federal Deposit Insurance Corporation (FDIC) protects depositors of failed banks, promotes stability and maintains public confidence in the banking system. The FDIC directs two federal deposit insurance programs - the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). ... The BIF has created an insurance fund through income from investments in U.S. ... On November 27, 1991, Congress passed a banking...

  • Word Count: 1613
  • Approx Pages: 6
  • Has Bibliography
  • Grade Level: Undergraduate

5. Banking History

This led to increased risk, but with deposit insurance, banks were willing to take on the risk leading to moral hazard. ... DIDMCA also increased deposit insurance from $40,000 to $100,000 while regulation Q rate ceilings were phased out. Brokered deposits were another innovation that made it easier to attain deposits. The FDIC insured deposits up to $100,000. Large depositors would go to a broker who would break larger sums into lots of $100,000 and deposit each $100,000 lot into a different bank to maintain insurance on all the funds. ...

  • Word Count: 2087
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6. The Banking Act of 1933

(Henriques) This Banking Act of 1933 also helped establish the Federal Deposit Insurance Corporation,FDIC. ... Gives the FDIC authority to provide deposit insurance to banks. Does not allow banks to sell securities. 1934 January 1, Fdic offers deposit insurance of $2,500. July 1, FDIC raises deposit insurance to $5,000. ... Provides permenent deposit insurance. ...

  • Word Count: 858
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  • Has Bibliography
  • Grade Level: High School

7. Managing My Income

My savings account consists of my annuity, life insurance, and deposit. My insurance company takes away the money to pay my insurance policy from this account. I have paid on insurance for two years. ... Fortunately, if I am still alive after retirement, not only my labor insurance but also personal annuity will pay pensions to me regularly. ...

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8. The Federal Reserve System - History and Structure

- A commercial bank accepts deposits and is covered by deposit insurance... - An investment bank trades in financial assets and is not covered by deposit insurance (more risky action)... - The most important measure for the prevention of bank runs was the adoption of the federal deposit insurance... The Savings and Loan Crisis of the 1980's - A savings and loan (thrift) is another type of deposit taking bank, usually specialized in issuing home loans. ... - For example they helped out the bank Bear Stearns and the insurance company AIG...

  • Word Count: 858
  • Approx Pages: 3
  • Grade Level: High School

9. Manager advantages

Banks, investment companies, insurance companies, and credit unions are known as financial intermediaries. Bank raises funds by borrowing (taking deposits) and lending that money to other borrowers together. ... Investment companies, insurance companies, and credit unions all offer similar services. 1) By pooling he resources of many small inventors, they are able to lend considerable sums to large borrowers.2) by lending to many borrowers, intermediaries achieve significant diversification, so that they can accept loans that individually might be too risky.3) intermediaries build expertise th...

  • Word Count: 317
  • Approx Pages: 1
  • Grade Level: Undergraduate

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