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Is Fairly Priced Deposit Insurance Possible?

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  • Chan, Yuk-Shee
  • Greenbaum, Stuart I
  • Thakor, Anjan V

Abstract

The authors analyze risk-sensitive, incentive-compatible deposit insurance in the presence of private information and moral hazard. Without deposit-linked subsidies, it is impossible to implement risk-sensitive, incentive-compatible deposit insurance pricing in a competitive, deregulated environment except when the deposit insurer is the least risk averse agent in the economy. The authors establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk-sensitive deposit insurance. Copyright 1992 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 47 (1992)
Issue (Month): 1 (March)
Pages: 227-45

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Handle: RePEc:bla:jfinan:v:47:y:1992:i:1:p:227-45

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References

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  1. John H. Kareken, 1983. "Deposit insurance reform or deregulation is the cart, not the horse," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  2. Deborah Lucas & Robert L. McDonald, 1987. "Bank Financing and Investment Decisions with Asymmetric Information," NBER Working Papers 2422, National Bureau of Economic Research, Inc.
  3. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  4. Greenbaum, Stuart I. & Thakor, Anjan V., 1987. "Bank funding modes : Securitization versus deposits," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 379-401, September.
  5. Giammarino, Ronald M & Lewis, Tracy R & Sappington, David E M, 1993. " An Incentive Approach to Banking Regulation," Journal of Finance, American Finance Association, vol. 48(4), pages 1523-42, September.
  6. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  8. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  9. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
  10. Kanatas, George, 1986. " Deposit Insurance and the Discount Window: Pricing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 41(2), pages 437-50, June.
  11. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Bhattacharya, Sudipto, 1982. " Aspects of Monetary and Banking Theory and Moral Hazard," Journal of Finance, American Finance Association, vol. 37(2), pages 371-84, May.
  13. Salman Shah & Anjan V. Thakor, 2004. "Optimal Capital Structure and Project Financing," Finance 0411041, EconWPA.
  14. David Pyle, 1984. "Deregulation and deposit insurance reform," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 5-15.
  15. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Information Reusability, Competition and Bank Asset Quality," Finance 0411049, EconWPA.
  16. Taggart, Robert A, Jr & Greenbaum, Stuart I, 1978. "Bank Capital and Public Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 158-69, May.
  17. Black, Fischer & Miller, Merton H & Posner, Richard A, 1978. "An Approach to the Regulation of Bank Holding Companies," The Journal of Business, University of Chicago Press, vol. 51(3), pages 379-412, July.
  18. Cummins, J David, 1988. " Risk-Based Premiums for Insurance Guaranty Funds," Journal of Finance, American Finance Association, vol. 43(4), pages 823-39, September.
  19. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
  20. McCulloch, J. Huston, 1985. "Interest-risk sensitive deposit insurance premia : Stable ACH estimates," Journal of Banking & Finance, Elsevier, vol. 9(1), pages 137-156, March.
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