New York's Safety Fund System
America's First Bank Insurance Experiment
Economists and regulatory agencies justify deposit insurance because they consider banks unique among capitalist firms. Because banks hold highly idiosyncratic portfolios that are hard for outside monitors to value correctly, macroeconomic shocks that threaten the viability of individual banks can threaten the entire system. Although deposit insurance diminishes the threat of bank runs and, thereby, creates a social benefit, deposit insurance also generates potentially large costs, which provides a justification for regulatory oversight and regulation. Like most bank insurance schemes, the Safety Fund was prone to moral hazard, or excessive risk taking by member banks and adverse selection, wherein better banks left the system, leaving only high‐risk banks as members. The system collapsed after only a small number of failures because of poor oversight, moral hazard, adverse selection, regulatory forbearance, and an under‐funded insurance.
Keywords: adverse selection, bank runs, deposit insurance, forbearance, macroeconomic shocks, moral hazard, regulation, regulatory oversight, risk‐taking, Safety Fund
Oxford Scholarship Online requires a subscription or purchase to access the full text of books within the service. Public users can however freely search the site and view the abstracts and keywords for each book and chapter.
Please, subscribe or login to access full text content.
If you think you should have access to this title, please contact your librarian.
To troubleshoot, please check our FAQs , and if you can't find the answer there, please contact us .