Systemic Risk and Deposit Insurance Premiums

While systemic risk—the risk of wholesale failure of banksand other financial institutions—is generally consideredto be the primary reason for supervision and regulation of thebanking industry, almost all regulatory rules treat such risk inisolation. In particular, they do not account for the very featuresthat create systemic risk in the first place, such as correlationamong banks’ investments (Acharya 2009; Acharya andYorulmazer 2007, 2008); the large size of some banks (O’Haraand Shaw 1990),1 which leads to “fire-sale”–related pecuniaryexternalities; and bank interconnectedness (Allen and Gale2000; Kahn and Santos 2005)...