Optimal regulation of a fully insured deposit banking system
AbstractWe analyze risk sensitive incentive compatible deposit insurance in the presence of private information when the market value of deposit insurance can be determined using Merton's (1997) formula. We show that, under the assumption that transferring funds from taxpayers to financial institutions has a social cost, the optimal regulation combines different levels of capital requirements combined with decreasing premia on deposit insurance. On the other hand, it is never efficient to require the banks to hold riskless assets, so that narrow banking is not efficient. Finally, chartering banks is necessary in order to decrease the cost of asymmetric information.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 175.
Date of creation: May 1996
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Web page: http://www.econ.upf.edu/
Regulation; mechanism design; deposit insurance pricing; capital requirements;
Other versions of this item:
- Freixas, Xavier & Gabillon, Emmanuelle, 1999. "Optimal Regulation of a Fully Insured Deposit Banking System," Journal of Regulatory Economics, Springer, vol. 16(2), pages 111-34, September.
- Freixas, X. & Gabillon, E., 1998. "Optimal Regulation of a Fully Insured Deposit Banking System," Papers 98.506, Toulouse - GREMAQ.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-1998-09-14 (All new papers)
- NEP-PBE-1998-09-14 (Public Economics)
- NEP-PUB-1998-09-14 (Public Finance)
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