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Deposit insurance, risk, and market power in banking

Author

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  • Michael C. Keeley

Abstract

A fixed-rate deposit insurance system provides a moral hazard for excessive risk taking and is not viable absent regulation. Although the deposit insurance system appears to have worked remarkably well over most of its 50-year history, major problems began to appear in the early 1980s. This paper addresses the puzzle of why major problems began to arise in the early 1980s and not sooner. ; The hypothesis is that increases in competition caused bank charter values to decline, which, in turn, caused banks to- increase default risk through increases. in asset risk and reductions in capital. This hypothesis is tested using pooled cross section time-series data for the 1970-1986 period for a sample of 85 large bank holding companies.

Suggested Citation

  • Michael C. Keeley, 1988. "Deposit insurance, risk, and market power in banking," Working Papers in Applied Economic Theory 88-07, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfap:88-07
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    Cited by:

    1. Simon Kwan & Robert A. Eisenbeis, 1995. "Bank Risk, Capitalization and Inefficiency," Center for Financial Institutions Working Papers 96-35, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Subal C. Kumbhaker & David C. Wheelock, 1992. "Which banks choose deposit insurance? Evidence of adverse and moral hazard in a voluntary insurance system," Working Papers 1991-005, Federal Reserve Bank of St. Louis.

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