This paper, originally published in the spring 1983 Quarterly Review, explains why flat-rate deposit insurance gives financial intermediaries an incentive to take on too much risk. It also discusses the purposes of deposit insurance and some ways reforms might serve those purposes. Three possible reforms are discussed: abolishing the insurance and requiring depository institutions to either hold safe assets or mark to market, reducing the deposit ceilings for insurance, and risk-adjusting the insurance premia.
Reprinted From: _Quarterly Review_ (Vol. 7, No. 2, Spring 1983, pp. 1-9), https://doi.org/10.21034/qr.721.