Location of Repository

Partial Deposit Insurance and Moral Hazard in Banking

By Gan Li and Wang Wen-Yao

Abstract

Abstract: Countries with deposit insurances differ significantly on how much protection their insurance provides. We study the optimal coverage limit in a model of deposit insurance with capital requirements and risk sensitive premia to prevent moral hazard. Depositors have incentives to monitor the bank’s risk taking behavior, thus threatening banks with withdrawals of deposits if necessary. We find that either banking regulations or market discipline is insufficient to reduce bank’s risk. In addition, our numerical example explains the differences in coverage cross countries which agrees with empirical evidence. We show that low income countries provide more generous insurance protection than higher income countries.

Topics: E65 - Studies of Particular Policy Episodes, G28 - Government Policy and Regulation, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Year: 2010
DOI identifier: 10.1108/10569211311301411
OAI identifier: oai:mpra.ub.uni-muenchen.de:25798

Suggested articles

Preview


To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.