Deposit Insurance: The Wrong Policy for Minimizing the Costs of Bank Failures

Deposit insurance is widely adopted to minimize the costs of bank failures. But recent evidence suggests that as applied in most countries, deposit insurance in the longer-run often increases both the cost and probability of bank failures. This paper argues that rather than shift the losses from insured depositors to the insurance provider, a more efficient policy solution would focus on minimizing, if not eliminating, the losses. Such a four-pillar is described and its implementation recommended.