Syndicate content

deposit insurance

Do We Need Deposit Insurance for Large Banks?

Asli Demirgüç-Kunt's picture

I don’t think so. You may think this is an odd statement since nearly every country around the world has been busy either introducing or at least expanding its insurance coverage since the 2008 financial crisis. This is not surprising, considering that the U.S. was also in the midst of a banking crisis in 1933 when it first introduced deposit insurance.

But think of it this way. Deposit insurance is not meant to stop systemic crises; as we all know by now, governments do that. The purpose of deposit insurance is to protect individual banks from bank runs, mostly during normal times. Since large banks already have implicit protection because they are perceived to be “too-big-to-fail,” deposit insurance is really there to keep small banks in business. To the extent we believe small banks have an important role to play in supporting small, local businesses, this may be a worthy goal. But why do we still have deposit insurance for large banks?