IS FAIRLY PRICED DEPOSIT INSURANCE POSSIBLE

We analyze risk-sensitive, incentive-compatible deposit insurance in t he presence of private information and moral hazard. Without deposit-l inked subsidies it is impossible to implement risk-sensitive, incentiv e-compatible deposit insurance pricing in a competitive, deregulated e nvironment, except when the deposit insurer is the least risk averse a gent in the economy. We establish this formally in the context of an i nsurance scheme in which privately informed depository institutions ar e offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This sugges ts a contradiction between deregulation and fairly priced, risk-sensit ive deposit insurance.