Deposit insurance and reinsurance

Abstract We study the consequences and optimal design of bank deposit insurance reinsurance in a general equilibrium setting. The model involves two production sectors, financed by bonds loans, respectively. Financial intermediation banks is required as we assume that one sectors risky requires monitoring banks. Households fund through deposits equity. Deposits are explicitly insured pay premium per unit deposits. Any remaining shortfall implicitly guaranteed government. Two types equilibria emerge: One type supports Pareto allocation. In other type, lending default risk excessively large. intuition follows: combination financial banks, limited liability shareholders, makes risk-free from individual households’ perspective, although they involve societal point view. This distorts investment choices resulting input allocation to sectors. show, however, judicious eliminates all non-optimal allocations. Our paper thus may provide benchmark result for policy proposals advocating cum reinsurance.