Fairly Priced Deposit Insurance and Bank Charter Policy.

The thrust of current deposit insurance reform--risk-based insurance premiums and capital requirements--is an effort to price deposit insurance more fairly. Fairly pricing deposit insurance eliminates inequitable wealth transfers, but it does not lead to an efficient equilibrium. This paper shows that an alternative charter policy results in an efficient separating equilibrium. The analysis provides support for the deposit insurance reform proposal in the recent NCFIRRE (1993) report to the President and Congress, and for Merton and Bodie's (1993) proposal.