If History Could be Re-Run: The Provision and Pricing of Deposit Insurance in 1933

Abstract

This paper examines cross-subsidy, moral hazard and bank liability issues related to the provision of federal deposit insurance by “re-running” its implementation, i.e., determining fair premium values, over the period 1927-1932. The pre-1933 period was characterized by historically high asset price volatility, a large number of bank failures and a weak federal safety net. In this economic context, we find a high degree of self-insurance on the part of the banks in our sample, both in terms of higher overall levels of capital and a strong correlation between capital levels and asset volatility. Potentially large, regionally-based, cross-subsidies among banks were found.