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Fair pricing of deposit insurance. Is it possible? Yes. Is it desirable? No

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  • FREIXAS, XAVIER
  • ROCHET, JEAN-CHARLES

Abstract

This note elaborates on a recent article by Chan, Greenbaum and Thakor (1992) who contend that fairly priced deposit insurance is incompatible with free competition in the banking sector, in the presence of adverse selection. We show here that at soon as one introduces a real economic motivation from private banks to manage the deposits from the public, then fairly priced deposit insurance becomes possible. However, we also show that such a fairly priced insurance is never desirable, precisely because of adverse selection. We compute the characteristics of the optimal premium schedule, which trades off between the cost of adverse selection and the cost of ``unfair competition ''.

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Bibliographic Info

Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 52 (1998)
Issue (Month): 3 (September)
Pages: 217-232

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Handle: RePEc:eee:reecon:v:52:y:1998:i:3:p:217-232

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Web page: http://www.elsevier.com/locate/inca/622941

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References

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  1. Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992. " Is Fairly Priced Deposit Insurance Possible?," Journal of Finance, American Finance Association, vol. 47(1), pages 227-45, March.
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Citations

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Cited by:
  1. Xavier Freixas & Gyöngyi Lóránth & Alan D. Morrison, 2005. "Regulating Financial Conglomerates," OFRC Working Papers Series 2005fe03, Oxford Financial Research Centre.
  2. Morrison, Alan D. & White, Lucy, 2011. "Deposit insurance and subsidized recapitalizations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3400-3416.
  3. Charles M. Kahn & João A.C. Santos, 2001. "Allocating bank regulatory powers: lender of last resort, deposit insurance, and supervision," Proceedings 717, Federal Reserve Bank of Chicago.
  4. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics 662, University of Munich, Department of Economics.
  5. Hamid Mehran & Alan Morrison & Joel Shapiro, 2011. "Corporate governance and banks: what have we learned from the financial crisis?," Staff Reports 502, Federal Reserve Bank of New York.
  6. John H. Boyd & Pedro Gomis & Sungkyu Kwak & Bruce D. Smith, 2000. "A User's Guide to Banking Crises," Development Research Unit Working Paper Series archive-36, Monash University, Department of Economics.
  7. Juha-Pekka Niinimäki, 2003. "Fairly Priced Deposit Insurance under Adverse Selection," Finnish Economic Papers, Finnish Economic Association, vol. 16(1), pages 38-48, Spring.
  8. Stefan Arping, 2009. "The Pricing of Bank Debt Guarantees," Tinbergen Institute Discussion Papers 09-057/2, Tinbergen Institute.
  9. Stefan Arping, 2009. "The Pricing of Bank Debt Guarantees," Tinbergen Institute Discussion Papers 09-057/2, Tinbergen Institute.
  10. Sebastián Nieto, 2005. "The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
  11. Loranth, Gyongyi & Morrison, Alan, 2009. "Internal Reporting Systems, Compensation Contracts, and Bank Regulation," CEPR Discussion Papers 7155, C.E.P.R. Discussion Papers.
  12. Wagner, Wolf, 2007. "The liquidity of bank assets and banking stability," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 121-139, January.
  13. Franklin Allen & Elena Carletti & Agnese Leonello, 2011. "Deposit insurance and risk taking," Oxford Review of Economic Policy, Oxford University Press, vol. 27(3), pages 464-478.
  14. Lóránth, Gyöngyi & Morrison, Alan, 2003. "Multinational Bank Regulation with Deposit Insurance and Diversification Effects," CEPR Discussion Papers 4148, C.E.P.R. Discussion Papers.
  15. Javier Suárez, 1998. "Risk-taking and the prudential regulation of banks," Investigaciones Economicas, Fundación SEPI, vol. 22(3), pages 307-336, September.
  16. Lóránth, Gyöngyi & Morrison, Alan, 2009. "Internal Reporting Systems, Compensation Contracts and Bank Regulation," CEPR Discussion Papers 7179, C.E.P.R. Discussion Papers.
  17. Kraft, Evan & Galac, Tomislav, 2007. "Deposit interest rates, asset risk and bank failure in Croatia," Journal of Financial Stability, Elsevier, vol. 2(4), pages 312-336, March.

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