Limited Deposit Insurance Coverage and Bank Competition

Oz Shy, Federal Reserve Banks - Federal Reserve Bank of Boston, Rune Stenbacka, Hanken School of Economics, and Vladimir Yankov, Federal Reserve Board discuss Limited Deposit Insurance Coverage and Bank Competition.

ABSTRACT: Deposit insurance schemes 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.