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Bank Failures: The Deposit Insurance Connection

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  • GERALD P. O'DRISCOLL
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    Abstract

    It is generally accepted that banks must be regulated so as to avoid the moral hazard situation that deposit insurance generates. Accepting this argument implies that expanded bank powers must await deposit insurance reform. This article rejects the accepted view and argues instead that the existing regulatory system enhances rather than diminishes the riskiness of banks' portfolios. The article argues that the benefits from permitting banks to diversify probably would outweigh the costs. It concludes, however, that deposit insurance is a major culprit in the current wave of bank failures. Copyright 1988 Western Economic Association International.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7287.1988.tb00282.x
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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

    Volume (Year): 6 (1988)
    Issue (Month): 2 (04)
    Pages: 1-12

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    Handle: RePEc:bla:coecpo:v:6:y:1988:i:2:p:1-12

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    Cited by:
    1. David C. Wheelock & Subal C. Kumbhaker, 1992. "The slack banker dances: deposit insurance and risk-taking in the banking collapse of the 1920s," Working Papers 1992-002, Federal Reserve Bank of St. Louis.
    2. Cordella, Tito & Yeyati, Eduardo Levy, 2002. "Financial opening, deposit insurance, and risk in a model of banking competition," European Economic Review, Elsevier, vol. 46(3), pages 471-485, March.
    3. David C. Wheelock & Paul W. Wilson, 1993. "Explaining bank failures: deposit insurance, regulation, and efficiency," Working Papers 1993-002, Federal Reserve Bank of St. Louis.

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