Deposit guarantee evaluation and incentives analysis in a mutual guarantee system
AbstractThis paper analyzes how the deposit guarantee value affects the risk incentives in a mutual guarantee system. We liken the guarantee's value to that of a European-style contingent claims portfolio. The main feature emerging from our model is that a mutual guarantee system would give banks an adverse incentive to increase riskiness. To mitigate this incentive, we introduce a regulatory provision modelled using a path-dependent contingent claim. By comparing the mutual guarantee system with a non-mutual one, we show that the former is less expensive, but implies higher adverse incentives for the banks, especially for undercapitalized institutions.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 33 (2009)
Issue (Month): 6 (June)
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Web page: http://www.elsevier.com/locate/jbf
Deposit insurance Mutual guarantee system Incentives evaluation Option pricing Forbearance;
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