Regulatory Monitoring, Closure Costs and Bank Moral Hazard Behavior
AbstractWe theoretically analyze the efficacy of close regulatory monitoring and early bank closure policies, introduced by the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA), in reducing the FDIC's losses and curbing bank moral hazard behavior induced by mis-priced deposit insurance. Contrary to conventional wisdom we demonstrate that continuous bank monitoring and early closure may in fact exacerbate the moral hazard problem if bank shareholders face a penalty upon closure. Moreover, if reputational disincentives and monitoring costs prevent the regulator from implementing timely closure then the bank's moral hazard incentives are significantly altered. These results suggest several new policy implications. Copyright 1997 by Kluwer Academic Publishers
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Bibliographic InfoArticle provided by Springer in its journal Journal of Regulatory Economics.
Volume (Year): 12 (1997)
Issue (Month): 3 (November)
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Web page: http://www.springerlink.com/link.asp?id=100298
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- Episcopos, Athanasios, 2008. "Bank capital regulation in a barrier option framework," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1677-1686, August.
- Lin, Jyh-Horng & Hung, Wei-Ming, 2013. "A barrier option framework for bank interest margin management under anticipatory regret aversion," Economic Modelling, Elsevier, vol. 33(C), pages 794-801.
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