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Fairly Priced Deposit Insurance under Adverse Selection

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  • Juha-Pekka Niinimäki

    (School of Business and Economics, University of Jyväskylä, Finland)

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    Abstract

    Fair pricing of deposit insurance represents one of the most difficult problems of bank regulation. This paper introduces an incentive compatible mechanism such that fair (risk-based) deposit insurance premiums can be achieved under adverse selection. The deposit insurer screens banks by offering full insurance coverage for high-risk banks and partial coverage for low-risk banks. If deposit interest rates can be regulated, low-risk banks also obtain full coverage. The optimal solution may require dividing deposits into junior and senior deposits. More generally, our analysis connects deposit insurance with standard insurance theory.

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    Bibliographic Info

    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 16 (2003)
    Issue (Month): 1 (Spring)
    Pages: 38-48

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    Handle: RePEc:fep:journl:v:16:y:2003:i:1:p:38-48

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