DEPOSIT INSURANCE REFORM - WHAT ARE THE ISSUES AND WHAT NEEDS TO BE FIXED

The current problems in the commercial banking industry have led to widespread calls for reform of the deposit insurance contract on the grounds that it promotes moral hazard. We review the empirical evidence for the significance of moral hazard as an important cause of the present crisis. We then evaluate various reform proposals grouped into two broad classes: proposals that seek to impose greater discipline on bank stockholders, and proposals to increase the disciplinary role of bank debtholders. Finally, we identify some issues that have received inadequate attention in the literature on bank regulation. © 1991.