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Deposit guarantee evaluation and incentives analysis in a mutual guarantee system

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  • De Giuli, Maria Elena
  • Maggi, Mario Alessandro
  • Paris, Francesco Maria
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    Abstract

    This 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 Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 6 (June)
    Pages: 1058-1068

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:6:p:1058-1068

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

    Related research

    Keywords: Deposit insurance Mutual guarantee system Incentives evaluation Option pricing Forbearance;

    References

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    1. Luc Laeven, 2004. "The Political Economy of Deposit Insurance," Journal of Financial Services Research, Springer, vol. 26(3), pages 201-224, December.
    2. Agusman, Agusman & Monroe, Gary S. & Gasbarro, Dominic & Zumwalt, J.K., 2008. "Accounting and capital market measures of risk: Evidence from Asian banks during 1998-2003," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 480-488, April.
    3. Armen Hovakimian & Edward Kane & Luc Laeven, 2003. "How Country and Safety-Net Characteristics Affect Bank Risk-Shifting," Journal of Financial Services Research, Springer, vol. 23(3), pages 177-204, June.
    4. Park, Sangkyun & Peristiani, Stavros, 2007. "Are bank shareholders enemies of regulators or a potential source of market discipline?," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2493-2515, August.
    5. Andrew Kuritzkes & Til Schuermann & Scott Weiner, 2002. "Deposit Insurance and Risk Management of the U.S. Banking System: How Much? How Safe? Who Pays?," Center for Financial Institutions Working Papers 02-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Merton, Robert C, 1978. "On the Cost of Deposit Insurance When There Are Surveillance Costs," The Journal of Business, University of Chicago Press, vol. 51(3), pages 439-52, July.
    7. Imai, Masami, 2006. "Market discipline and deposit insurance reform in Japan," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3433-3452, December.
    8. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 283-295, June.
    9. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    10. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA.
    11. Edward J. Kane & Asli Demirguc-Kunt, 2001. "Deposit Insurance Around the Globe: Where Does it Work?," NBER Working Papers 8493, National Bureau of Economic Research, Inc.
    12. Luc Laeven, 2002. "Bank Risk and Deposit Insurance," World Bank Economic Review, World Bank Group, vol. 16(1), pages 109-137, June.
    13. Charles W. Calomiris, 1989. "Deposit insurance: lessons from the record," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 10-30.
    14. Nikitin, Maxim & Smith, R. Todd, 2008. "Information acquisition, coordination, and fundamentals in a financial crisis," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 907-914, June.
    15. Masami Imai, 2006. "Market Discipline and Deposit Insurance Reform in Japan," Wesleyan Economics Working Papers 2006-007, Wesleyan University, Department of Economics.
    16. Huizinga, Harry & Nicodeme, Gaetan, 2006. "Deposit insurance and international bank liabilities," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 965-987, March.
    17. Maria Giuli & Dean Fantazzini & Mario Maggi, 2008. "A New Approach for Firm Value and Default Probability Estimation beyond Merton Models," Computational Economics, Society for Computational Economics, vol. 31(2), pages 161-180, March.
    18. G. G. Garcia, 1999. "Deposit Insurance," IMF Working Papers 99/54, International Monetary Fund.
    19. Allen, Linda & Saunders, Anthony, 1993. "Forbearance and valuation of deposit insurance as a callable put," Journal of Banking & Finance, Elsevier, vol. 17(4), pages 629-643, June.
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    Cited by:
    1. Dirk Broeders & An Chen, 2008. "Pension regulation and the market value of pension liabilities - a contingent claims analysis using Parisian options," DNB Working Papers 183, Netherlands Central Bank, Research Department.
    2. Morrison, Alan D. & White, Lucy, 2011. "Deposit insurance and subsidized recapitalizations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3400-3416.
    3. Markus R. Kosters & Stefan T.M. Streatmans & Mario Maggi, 2011. "Pricing Full Deposit Insurance in Germany amidst the Financial Crisis 2008-2010," Quaderni di Dipartimento 143, University of Pavia, Department of Economics and Quantitative Methods.
    4. Andries, Natalia & Billon, Steve, 2010. "The effect of bank ownership and deposit insurance on monetary policy transmission," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3050-3054, December.

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