This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Deposit insurance, moral hazard and market monitoring

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Reint Gropp () (European Central Bank, Directorate General Research)
Jukka Vesala (Finnish Financial Supervision Authority, Prudential Supervision)

Additional information is available for the following registered author(s):

Abstract

The paper analyses the relationship between deposit insurance, debt-holder monitoring, and risk taking. In a stylised banking model we show that deposit insurance may reduce moral hazard, if deposit insurance credibly leaves out non-deposit creditors. Testing the model using EU bank level data yields evidence consistent with the model, suggesting that explicit deposit insurance may serve as a commitment device to limit the safety net and permit monitoring by uninsured subordinated debt holders. We further find that credible limits to the safety net reduce risk taking of smaller banks with low charter values and sizeable subordinated debt shares only. However, we also find that the introduction of explicit deposit insurance tends to increase the share of insured deposits in banks’ liabilities.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp302.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 302.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 47 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:ecb:ecbwps:20040302

Contact details of provider:
Postal: Postfach 16 03 19, Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/home/html/index.en.html
More information through EDIRC

Order Information:
Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Email:

For technical questions regarding this item, or to correct its listing, contact: (Official Publications).

Related research
Keywords: Banking; Moral Hazard; Market Monitoring; Deposit Insurance.;

Other versions of this item:

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Brewer, Elijah, III & Mondschean, Thomas H, 1994. "An Empirical Test of the Incentive Effects of Deposit Insurance: The Case of Junk Bonds at Savings and Loan Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 146-64, February. [Downloadable!] (restricted)
  2. Cordella, Tito & Yeyati, Eduardo Levy, 2002. "Financial opening, deposit insurance, and risk in a model of banking competition," European Economic Review, Elsevier, vol. 46(3), pages 471-485, March. [Downloadable!] (restricted)
    Other versions:
  3. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October. [Downloadable!] (restricted)
  4. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14. [Downloadable!]
  5. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937.
  6. Frederick T. Furlong & Michael C. Keeley, 1987. "Bank capital regulation and asset risk," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-40. [Downloadable!]
  7. Enrica Detragiache & Asli Demirgüç-Kunt, 2000. "Does Deposit Insurance Increase Banking System Stability?," IMF Working Papers 00/3, International Monetary Fund.
  8. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June. [Downloadable!] (restricted)
  9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vasso Ioannidou & Jan de Dreu, 2006. "The Impact of Explicit Deposit Insurance on Market Discipline," DNB Working Papers 089, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  2. Olli Castrén & Trevor Fitzpatrick & Matthias Sydow, 2006. "What drives EU banks’ stock returns? Bank-level evidence using the dynamic dividend-discount model," Working Paper Series 677, European Central Bank. [Downloadable!]
  3. Robert Cull & Stephen Haber & Masami Imai, 2006. "All Bad, All of the Time? Related Lending and Financial Development," Wesleyan Economics Working Papers 2006-015, Wesleyan University, Department of Economics. [Downloadable!]
  4. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics 662, University of Munich, Department of Economics. [Downloadable!]
  5. Rafael Repullo, 2004. "Policies For Banking Crises: A Theoretical Framework," Working Papers wp2004_0418, CEMFI. [Downloadable!]
    Other versions:
  6. Frederick T. Furlong & Robard Williams, 2006. "Financial market signals and banking supervision: are current practices consistent with research findings?," Economic Review, Federal Reserve Bank of San Francisco, pages 17-29. [Downloadable!]
  7. George Kaufman, 2004. "Bank regulation and foreign-owned banks," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, june. [Downloadable!]
  8. Ludger Schuknecht & Felix Eschenbach, 2002. "Asset prices and fiscal balances," Working Paper Series 141, European Central Bank. [Downloadable!]
Statistics
Access and download statistics

Did you know? IDEAS also indexes books.

This page was last updated on 2009-12-1.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.