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A Hierarchical Agency Model of Deposit Insurance

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This paper develops a hierarchical agency model of deposit insurance. The main purpose is to undertake a game theoretic analysis of the consequences of deposit insurance schemes and their effects on monitoring incentives for banks. Using this simple framework, we analyze both risk- independent and risk-dependent premium schemes along with reserve requirement constraints. The results provide policymakers with not only a better understanding of the effects of deposit insurance on welfare and the problem of moral hazard, but also the policy implications implied in the design of de- posit insurance schemes. Our finding is consistent with the empirical research on depositor discipline.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 410.

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Date of creation: 2010
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Handle: RePEc:qld:uq2004:410

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  1. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 55(6), pages 2431-2465, December.
  2. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1751, Econometric Society.
  3. Hooks, Linda M. & Robinson, Kenneth J., 2002. "Deposit Insurance And Moral Hazard: Evidence From Texas Banking In The 1920s," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 62(03), pages 833-853, September.
  4. Park, Sangkyun & Peristiani, Stavros, 1998. "Market Discipline by Thrift Depositors," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(3), pages 347-64, August.
  5. Douglas W. Diamond & Raghuram G. Rajan, . "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 476, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  6. Grossman, Richard S, 1992. "Deposit Insurance, Regulation, and Moral Hazard in the Thrift Industry: Evidence from the 1930's," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 800-821, September.
  7. Ensar Yilmaz & Alovsat Muslumov, 2008. "Deposit insurance and moral hazard problem: the case of Turkish banking system," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 40(16), pages 2147-2163.
  8. Karels, Gordon V. & McClatchey, Christine A., 1999. "Deposit insurance and risk-taking behavior in the credit union industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 23(1), pages 105-134, January.
  9. 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, Blackwell Publishing, vol. 26(1), pages 146-64, February.
  10. Park, Sangkyun, 1995. "Market discipline by depositors: Evidence from reduced-form equations," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 35(35), pages 497-514.
  11. Ronn, Ehud I & Verma, Avinash K, 1986. " Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, American Finance Association, vol. 41(4), pages 871-95, September.
  12. Marcus, Alan J & Shaked, Israel, 1984. "The Valuation of FDIC Deposit Insurance Using Option-pricing Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 16(4), pages 446-60, November.
  13. Choi, E. Kwan & Menzes, Carmen F., 1992. "Is Relative Risk Aversion Greater Than One?," Staff General Research Papers, Iowa State University, Department of Economics 421, Iowa State University, Department of Economics.
  14. Pennacchi, George, 2006. "Deposit insurance, bank regulation, and financial system risks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(1), pages 1-30, January.
  15. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(2), pages 375-399, March.
  16. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, American Economic Association, vol. 65(5), pages 900-922, December.
  17. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
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