Advanced Search
MyIDEAS: Login to save this paper or follow this series

How Incentive-Incompatible Deposit-Insurance Funds Fail

Contents:

Author Info

  • Edward J. Kane

Abstract

An incentive-incompatible deposit-insurance fund (IIDIF) is a scheme. Lot guaranteeing deposits at client institutions that deploys defective systems of information collection, client monitoring, and risk management. These defective systems encourage voluntary risk- taking by clients and by managers and politicians responsible for administering the fund. The paper focuses on how principal-agent conflicts and asymmetries in the distribution of information lead to myopic behavior by IIDIF managers and by politicians who appoint and constrain them. Drawing on data developed in legislative hearings and investigations and in sworn depositions, the paper documents that managers of IISIFs in Ohio and Maryland knew well in advance of their funds' 1985 failures that important clients were both economically insolvent and engaging in inappropriate forms of risk-taking. It also establishes that staff proposals for publicizing and bringing these clients' risk-taking under administrative control were repeatedly rejected. The analysis has a forward-looking purpose. Congress and federal regulators have managed the massively undercapitalized Federal Savings and Loan Insurance Corporation (FSLIC) in much the same way Ohio and Maryland officials did. Unless and until incentives supporting political, bureaucratic and private risk-taking are reformed, the possibility of a FSLIC meltdown cannot be dismissed. To encourage timely intervention into insolvencies developing in a deposit-insurance fund's client base, the most meaningful reforms would be to force the development and release of estimates of the market value of the insurance enterprise and to require fund managers to use the threat of takeover to force decapitalized clients to recapitalize well before they approach insolvency.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. 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.nber.org/papers/w2836.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2836.

as in new window
Length:
Date of creation: Feb 1989
Date of revision:
Publication status: published as "The Incentive Incompatibility of Government Sponsored Deposit-Insurance Funds," George Kaufman (ed.), Research in Financial Services: Private and Public Policy. JAI Press, 1992, pp. 51-91
Handle: RePEc:nbr:nberwo:2836

Note: ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Edward J. Kane, 1987. "DANGERS OF CAPITAL FORBEARANCE: THE CASE OF THE FSLIC AND "ZOMBIE" S&Ls," Contemporary Economic Policy, Western Economic Association International, vol. 5(1), pages 77-83, 01.
  2. Edward J. Kane, 1987. "Who should learn what from the failure and delayed bailout of the ODGF?," Proceedings 162, Federal Reserve Bank of Chicago.
  3. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Walker F. Todd & James B. Thomson, 1990. "An insider's view of the political economy of the too big to fail doctrine," Working Paper 9017, Federal Reserve Bank of Cleveland.
  2. Morrison, Alan D. & White, Lucy, 2011. "Deposit insurance and subsidized recapitalizations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3400-3416.
  3. Charles W. Calomiris, 1994. "Is the discount window necessary? a Penn Central perspective," Review, Federal Reserve Bank of St. Louis, issue May, pages 31-55.
  4. Frederic S. Mishkin, 1992. "An Evaluation of the Treasury Plan for Banking Reform," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 133-153, Winter.
  5. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August.
  6. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications 5819, Inter-American Development Bank.
  7. Ho, Chia-Ling & Lai, Gene C. & Lee, Jin-Ping, 2014. "Financial reform and the adequacy of deposit insurance fund: Lessons from Taiwanese experience," International Review of Economics & Finance, Elsevier, vol. 30(C), pages 57-77.
  8. Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, vol. 95(5), pages 1548-1572, December.
  9. Brock, Philip L., 1998. "Financial safety nets and incentive structures in Latin America," Policy Research Working Paper Series 1993, The World Bank.
  10. Pablo Gluzmann & Martín Guzman, 2011. "Financial Reforms and Financial Instability," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(61-62), pages 35-73, January -.
  11. William P. Osterberg & James B. Thomson, 1990. "The effect of subordinated debt and surety bonds on banks' cost of capital and on the value of federal deposit insurance," Working Paper 9012, Federal Reserve Bank of Cleveland.
  12. George G. Kaufman, 2003. "Depositor liquidity and loss-sharing in bank failure resolutions," Working Paper Series WP-03-02, Federal Reserve Bank of Chicago.
  13. Michael Gavin & Ricardo Hausmann, 1996. "Las raíces de las crisis bancarias: contexto macroeconómico," Research Department Publications 4027, Inter-American Development Bank, Research Department.
  14. Morrison, Alan D. & White, Lucy, 2010. "Reputational contagion and optimal regulatory forbearance," Working Paper Series 1196, European Central Bank.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2836. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.