Bank Capital Adequacy versus Deposit Insurance

Dowd, K.

Abstract

This paper re-evaluates the Diamond-Dybvig analysis of deposit insurance by constructing a model in which an agent not in need of liquidity sets up a financial intermediary to sell liquidity insurance to other agents who desire such insurance. This intermediary resembles a real-world bank in that it is financed by both demand deposits and equity. It also dominates the Diamond-Dybvig intermediary, which is funded only by demand deposits. Provided the intermediary has adequate capital, it also is perfectly safe. Deposit insurance then is both unnecessary and incapable of achieving a superior outcome to that which private agents could achieve on their own.

Citation

Dowd, K. (2000). Bank Capital Adequacy versus Deposit Insurance. Journal of Financial Services Research, 17(1), 7-15. https://doi.org/10.1023/a%3A1008149106536

• Journal Article Type: Article
• Publication Date: Feb 1, 2000
• Deposit Date: Mar 7, 2013
• Publicly Available Date: Jun 7, 2016
• Journal: Journal of Financial Services Research
• Print ISSN: 0920-8550
• Electronic ISSN: 1573-0735
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• Volume: 17
• Issue: 1
• Pages: 7-15
• DOI: https://doi.org/10.1023/a%3A1008149106536
• Public URL: https://durham-repository.worktribe.com/output/1465555