RWP 26-11, August 2026
This paper examines the relationship between bank capital and reliance on insured deposit funding. Contrary to the conventional moral-hazard view underlying risk-based capital regulation, U.S. bank data reveal a robust negative association between capital and the share of insured deposits. We develop a delegated-monitoring model in which banks choose between insured and uninsured deposit financing. Although monitoring increases with capital under both funding regimes, its sensitivity to capital is greater when deposits are uninsured, strengthening the relative attractiveness of uninsured funding for well-capitalized banks. Our contribution is to show that the relationship between bank capital and deposit insurance depends not only on the direct effect of capital on risk-taking, but also on how capitalization changes a bank’s incentives to monitor under different funding arrangements.
JEL classifications: C78, D82, G11
Article Citation
Dam, Kaniska, and Rajdeep Sengupta. 2026. “Bank Capital and Deposit Insurance.” Federal Reserve Bank of Kansas City, Research Working Paper no. 26-11, August. Available at External Linkhttps://doi.org/10.18651/RWP2026-11
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
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