In his article “Funding Deposit Insurance” published in the Journal of Financial Stability, Consultant Dick Oosthuizen develops a quantitative framework to determine how deposit insurance schemes should be funded. Deposit insurance provides coverage for depositors in case of bank failures. In practice, these bank failures are resolved with premiums collected from all banks before a crisis to build an insurance fund. Otherwise, taxpayers often bear the burden of bailing out banks.

Dr. Oosthuizen’s article finds that by accumulating a fund through premiums before a crisis, policymakers can curtail excessive risk-taking by banks, insulate taxpayers from large fiscal shortfalls, and mitigate the frequency of bank failures by increasing coverage for depositors. However, policymakers should balance the benefits of building a fund with its opportunity costs: Premiums reduce the available capital for banks to otherwise productively invest.