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An Incentive Approach to Banking Regulation

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Author Info

  • Giammarino, R.M.
  • Sappington, D.E.M.

Abstract

The authors examine the optimal design of a risk-adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank's assets (adverse selection) and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality (moral hazard). Under a socially optimal insurance scheme: (1) asset quality is below the first-best level, (2) higher-quality banks have larger asset bases and face lower capital adequacy requirements than lower-quality banks, and (3) the probability of failure is equated across banks. Copyright 1993 by American Finance Association.

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Bibliographic Info

Paper provided by California Davis - Institute of Governmental Affairs in its series Papers with number 367.

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Length: 19 pages
Date of creation: 1990
Date of revision:
Handle: RePEc:fth:caldav:367

Contact details of provider:
Postal: UNIVERSITY OF CALIFORNIA DAVIS, INSTITUTE OF GOVERNMENTAL AFFAIRS, RESEARCH PROGRAM IN APPLIED MACROECONOMICS AND MACRO POLICY, DAVIS CALIFORNIA 95616 U.S.A.

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Keywords: regulations ; banks ; risk;

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