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date: 11 April 2021

Abstract and Keywords

Deposit insurance is a widely adopted policy to promote financial stability in the banking sector. Deposit insurance helps ensure depositor confidence in the financial system and prevents contagious bank runs, but it also comes with an unintended consequence of encouraging banks to take on excessive risk. In this chapter, we begin with a review of the economic costs and benefits associated with deposit insurance. Drawing on the recent literature, we then review and discuss optimal deposit insurance design and risk-based pricing of insurance premiums. Finally, we discuss the impact of the larger institutional environment on how well deposit insurance schemes work in practice.

Keywords: bank runs, deposit insurance, deposit insurance design, market discipline, moral hazard

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