DEPOSIT INSURANCE PRICING AND SOCIAL-WELFARE

Recent literature has established that financial disruption has real c osts which justify government intervention in the financial sector. On e form of government intervention is deposit insurance. In this paper we determine the optimal pricing and subsidy of deposit insurance in a social welfare context. The main conclusion is that optimal deposit i nsurance need not be actuarially fair. In an economy with a real and a financial sector we consider the effects of taxation and social (poli tical) weights of the sectors. We analyze two policy tools: government supervision and deposit insurance pricing.