Surely one of the goals of deposit insurance is the protection of depositors. Up until now there has been little consideration given to the welfare of depositors within the literature. After surveying the design of deposit insurance schemes in Australia, The United States of America, The United Kingdom and Japan, a 2 period, Principal, Agent and Supervisor model, with an explicit depositor welfare function is employed to analyze different design elements of these schemes.
It is found that when depositors are sufficiently risk averse they are always better off with some form of deposit insurance, unless the bank will behave in a way that will guarantee solvency in the 2nd period when there is no deposit insurance. Providing deposit insurance for free does not alter the behaviour of depositors compared to any other fixed priced deposit insurance scheme, it will however, provide greater utility to depositors. It is also found that risk based premiums still encourage depositors to discipline banks, while ensuring that resources are available in the second period for consumption. Thus, there will be circumstances when a bank will choose a riskier strategy with fixed premiums than they would with variable premiums.
This means there will be occasions when variable insurance is preferred even when resulting premiums are higher. It is also found that the proportion of deposits insured will not alter the depositors (and therefore the banks) decision making. It is still found however, the higher the proportion of deposits insured, the higher the expected utility of consumers. Finally a simulation is run using real banking data from with in Australia, making more specific the conditions when each deposit insurance scheme may be preferred.