Faculty Affairs and Academic Programs
Shohini Kundu
Business and Management
The Expanding Cost and Scope of Deposit Insurance
Deposit insurance has played a central role in promoting financial stability since the creation of the FDIC in 1933. By guaranteeing depositors against loss, it prevents bank runs and reinforces confidence in the banking system. No depositor in an FDIC-insured account has ever lost money -- a record that speaks to the policy's effectiveness. However, deposit insurance also represents a significant and often underappreciated fiscal commitment. As of 2023, over $10 trillion in deposits were insured by a fund with only $128 billion in reserves, creating a 78:1 ratio of exposure to capital. This project investigates the hidden economic and fiscal costs of deposit insurance and how financial innovation has quietly expanded the government's fiscal exposure through two studies. First, I show that because insurance premiums do not adjust to match bank risk, riskier banks effectively receive larger subsidies, approximately $50 billion annually across the system. These banks respond by expanding their deposit funding exactly when they are most fragile, creating procyclical fiscal exposure. Second, I document how reciprocal deposit networks -- a market-based workaround to coverage limits -- expanded government guarantees by $416 billion between 2011 and 2023, with most of this growth occurring outside regulatory view.
