Don’t Expand Deposit Insurance. Abolish It!

April 03, 2023

The collapse of Silicon Valley Bank has some policymakers considering expanding government deposit insurance to cover all deposits. Those advocating such a move believe it will help stabilize the banking system and prevent future bank runs. While these are desirable objectives, expanding deposit insurance won’t accomplish them.

The notion that deposit insurance could destabilize the banking system isn’t immediately apparent. Indeed, it seems reasonable to think that if the government insures everyone’s deposits, they’ll have no reason to rush to withdraw their money from the banking system in the event of a panic. Thus, it would appear the government can prevent bank runs from occurring in the first place. While seemingly plausible, this view fails to account for the effect deposit insurance has on the incentives faced by depositors and banks.