Deposit Insurance, the Implicit Regulatory Contract, and the Mismatch in the Term Structure of Banks' Assets and Liabilities

Abstract

Professors Macey and Miller explore the relationship between deposit insurance and the mismatch in the term structure of commercial banks' assets and liabilities. After critiquing the traditional regulatory hypothesis, which posits that banks have incentives to fund long-term assets with short-term liabilities because government-sponsored deposit insurance enhances bank credit and subsidizes short-term liabilities, they use public choice theory to argue that a modified version of the regulatory hypothesis is the best explanation for the mismatch in the term structure of banks' assets and liabilities. Finally, they argue that embracing the regulatory hypothesis does not imply acceptance of the government-sponsored deposit insurance scheme as it exists in the U.S. today.