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Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking?

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  • DeLong, Gayle
  • Saunders, Anthony
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    Abstract

    We investigate whether the introduction of fixed-price U.S. federal deposit insurance in 1933 increased the risk-taking of banks over the succeeding period. We examine 60 financial institutions and find that banks and trusts in general became more risky after the introduction of deposit insurance. However, a subset of well-performing banks appears to have reduced their risk. Deposit insurance also reduced the incentives of depositors to discriminate between ex ante weaker and stronger banks thus reducing depositor discipline in return for greater banking system stability.

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    File URL: http://www.sciencedirect.com/science/article/B7CRR-4TPPF3C-1/2/dc2d593d27d3ad5458b1cf168c2dc2f2
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 7 (2011)
    Issue (Month): 1 (January)
    Pages: 19-25

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    Handle: RePEc:eee:finsta:v:7:y:2011:i:1:p:19-25

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    Web page: http://www.elsevier.com/locate/jfstabil

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    Keywords: Banks Risk Regulation Deposit insurance;

    References

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    1. Merton, Robert C., 1977. "On the cost of deposit insurance when there are surveillance costs," Working papers 903-77., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Edward J. Kane & Berry K. Wilson, 1998. "A contracting-theory intepretation of the origins of Federal deposit insurance," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 573-595.
    3. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
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    Cited by:
    1. Buch, Claudia M. & Körner, Tobias & Weigert, Benjamin, 2013. "Towards deeper financial integration in Europe: What the Banking Union can contribute," Working Papers 02/2013, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    2. Cubillas, Elena & González, Francisco, 2014. "Financial liberalization and bank risk-taking: International evidence," Journal of Financial Stability, Elsevier, vol. 11(C), pages 32-48.
    3. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2014. "Institutional development and bank stability: Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 160-176.

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