Economic Review

Deposit insurance, while reducing the threat of bank runs, also lessens bankers’ incentives to control risks. Reforms of the deposit insurance system are necessary to discourage excessive risk taking such as characterized the recent S&L crisis. The adoption of market value accounting, early closing of failed banks, and exposing uninsured depositors and creditors to losses—all would give bankers less incentives to take excessive risks with insured deposits.

View Full Article