Private Prices, Public Insurance: The Pricing of Federal Deposit Insurance

Under the current federal deposit insurance system, all banks pay the same fee per dollar of deposit regardless of individual risk. Various proposals for the public and private pricing of deposit insurance are discussed, and a proposal that would permit government insurers to use financial markets to price deposit insurance contracts is described. Provisions of the proposal include: 1. The government insurer must decide what types of deposits it wants to be insured. 2. Losses will be shared on a pro rata basis. 3. All private insurers will be required to post collateral in the form of short-term Treasury securities capable of completely covering the private insurer's exposure. 4. The public sector will indirectly determine the level of premiums by choosing the proportion of insurance that should be provided by the private sector, while the private sector will set the relative premiums. 5. It will be impossible for a private insurer to escape liability by canceling a contract. 6. All insolvent banks will be sold at open auction.