November 2014

Limited Deposit Insurance Coverage and Bank Competition

Oz Shy, Rune Stenbacka, and Vladimir Yankov

Abstract:

Deposit insurance designs in many countries place a limit on the coverage of deposits in each bank. However, no limits are placed on the number of accounts held with different banks. Therefore, under limited deposit insurance, some consumers open accounts with different banks to achieve higher or full deposit insurance coverage. We compare three regimes of deposit insurance: No deposit insurance, unlimited deposit insurance, and limited deposit insurance. We show that limited deposit insurance weakens competition among banks and reduces total welfare relative to no or unlimited deposit insurance.

Accessible materials (.zip)

Keywords: Limited deposit insurance coverage, deposit rates, bank competition

PDF: Full Paper

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Last Update: June 26, 2020