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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Limited Deposit Insurance Coverage and Bank Competition
Oz Shy
Rune Stenbacka
Vladimir Yankov
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.


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Oz Shy & Rune Stenbacka & Vladimir Yankov, Limited Deposit Insurance Coverage and Bank Competition, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2014-53, 06 Aug 2014.
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Keywords: Limited deposit insurance coverage; deposit rates; bank competition
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