DEPOSIT INSURANCE PRICING AND SOCIAL-WELFARE

Recent literature has established that financial disruption has real costs which justify government intervention in the financial sector. One form of government intervention is deposit insurance. In this paper we determine the optimal pricing and subsidy of deposit insurance in a social welfare context. The main conclusion is that optimal deposit insurance need not be actuarially fair. In an economy with a real and a financial sector we consider the effects of taxation and social (political) weights of the sectors. We analyze two policy tools: government supervision and deposit insurance pricing.