Deposit insurance and regulation in a Diamond-Dybvig banking model with a risky technology (*)
AbstractThree deposit insurance schemes are studied in a version of the Diamond-Dybvig banking model with a risky technology. The schemes include a full deposit guarantee and two alternatives which people have suggested as ways to limit the moral hazard problem of deposit insurance: deductible and coinsurance. Regulation to suppress the moral hazard problem under each scheme takes the form of solvency and incentive compatibility constraints. When the regulation is relaxed slightly, as it might be under regulatory error, the insurer's payout is lower under the alternatives than under the full guarantee. However, the coinsurance and deductible schemes are less effective at preventing bank runs than the full guarantee. Moreover, in some environments, even the full guarantee itself does not provide enough reassurance to rule out bank runs.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 9 (1997)
Issue (Month): 3 ()
Note: Received: May 8, 1995; revised version August 14, 1995
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
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- Antoine Martin, 2001.
"Liquidity provision vs. deposit insurance : preventing bank panics without moral hazard?,"
Research Working Paper
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- Niinimaki, Juha-Pekka, 2002. "Do time deposits prevent bank runs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 19-31, February.
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