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Fair pricing of deposit insurance. Is it possible? Yes. Is it desirable? No

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  • Xavier Freixas

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  • Jean Charles Rochet

Abstract

This note elaborates on a recent article by Chan, Greenbaum and Thakor (1992) who contend that fairly priced deposit insurance is incompatible with free competition in the banking sector, in the presence of adverse selection. We show here that at soon as one introduces a real economic motivation from private banks to manage the deposits from the public, then fairly priced deposit insurance becomes possible. However, we also show that such a fairly priced insurance is never desirable, precisely because of adverse selection. We compute the characteristics of the optimal premium schedule, which trades off between the cost of adverse selection and the cost of ``unfair competition ''.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 130.

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Date of creation: Jan 1995
Date of revision: Jun 1995
Handle: RePEc:upf:upfgen:130

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Web page: http://www.econ.upf.edu/

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  1. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance, EconWPA 0411018, EconWPA.
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Cited by:
  1. Lóránth, Gyöngyi & Morrison, Alan, 2009. "Internal Reporting Systems, Compensation Contracts and Bank Regulation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7179, C.E.P.R. Discussion Papers.
  2. Hamid Mehran & Alan Morrison & Joel Shapiro, 2011. "Corporate governance and banks: what have we learned from the financial crisis?," Staff Reports, Federal Reserve Bank of New York 502, Federal Reserve Bank of New York.
  3. Charles M. Kahn & João A.C. Santos, 2001. "Allocating bank regulatory powers: lender of last resort, deposit insurance, and supervision," Proceedings, Federal Reserve Bank of Chicago 717, Federal Reserve Bank of Chicago.
  4. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics, University of Munich, Department of Economics 662, University of Munich, Department of Economics.
  5. Freixas, Xavier & Lóránth, Gyöngyi & Morrison, Alan, 2005. "Regulating Financial Conglomerates," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5036, C.E.P.R. Discussion Papers.
  6. John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.
  7. Franklin Allen & Elena Carletti & Agnese Leonello, 2011. "Deposit insurance and risk taking," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 27(3), pages 464-478.
  8. Lóránth, Gyöngyi & Morrison, Alan, 2003. "Multinational Bank Regulation with Deposit Insurance and Diversification Effects," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4148, C.E.P.R. Discussion Papers.
  9. Loranth, Gyongyi & Morrison, Alan, 2009. "Internal Reporting Systems, Compensation Contracts, and Bank Regulation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7155, C.E.P.R. Discussion Papers.
  10. Javier Suárez, 1998. "Risk-taking and the prudential regulation of banks," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 22(3), pages 307-336, September.
  11. Arping, Stefan, 2010. "The pricing of bank debt guarantees," Economics Letters, Elsevier, Elsevier, vol. 108(2), pages 119-121, August.
  12. Kraft, Evan & Galac, Tomislav, 2007. "Deposit interest rates, asset risk and bank failure in Croatia," Journal of Financial Stability, Elsevier, Elsevier, vol. 2(4), pages 312-336, March.
  13. Sebastián Nieto, 2005. "The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
  14. repec:dgr:uvatin:2009057 is not listed on IDEAS
  15. Morrison, Alan D. & White, Lucy, 2011. "Deposit insurance and subsidized recapitalizations," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(12), pages 3400-3416.
  16. Wagner, Wolf, 2007. "The liquidity of bank assets and banking stability," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(1), pages 121-139, January.
  17. Juha-Pekka Niinimäki, 2003. "Fairly Priced Deposit Insurance under Adverse Selection," Finnish Economic Papers, Finnish Economic Association, Finnish Economic Association, vol. 16(1), pages 38-48, Spring.

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