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Is Fairly Priced Deposit Insurance Possible?

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Author Info
Yuk-Shee Chan (University of Southern California)
Stuart I. Greenbaum (Olin School of Business, Washington University)
Anjan V. Thakor (Olin School of Business, Washington University)

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Abstract

We analyze risk-sensitive, incentive-compatible deposit insurance in the presence of private information and moral hazard. Without deposit-linked subsidies it is impossible to implement risk-sensitive, incentive- compatible deposit insurance pricing in a competitive, deregulared environment, except when the deposit insurer is the least risk averase agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk-sensitive deposit insurance.

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Paper provided by EconWPA in its series Finance with number 0411018.

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Length: 20 pages
Date of creation: 10 Nov 2004
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Handle: RePEc:wpa:wuwpfi:0411018

Note: Type of Document - pdf; pages: 20
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G - Financial Economics

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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.:
  1. Kanatas, George, 1986. " Deposit Insurance and the Discount Window: Pricing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 41(2), pages 437-50, June. [Downloadable!] (restricted)
  2. Giammarino, R.M. & Sappington, D.E.M., 1990. "An Incentive Approach to Banking Regulation," Papers 367, California Davis - Institute of Governmental Affairs.
  3. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October. [Downloadable!] (restricted)
  4. McCulloch, J. Huston, 1985. "Interest-risk sensitive deposit insurance premia : Stable ACH estimates," Journal of Banking & Finance, Elsevier, vol. 9(1), pages 137-156, March. [Downloadable!] (restricted)
  5. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December. [Downloadable!] (restricted)
  6. Shah, Salman & Thakor, Anjan V., 1987. "Optimal capital structure and project financing," Journal of Economic Theory, Elsevier, vol. 42(2), pages 209-243, August. [Downloadable!] (restricted)
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  7. Cummins, J David, 1988. " Risk-Based Premiums for Insurance Guaranty Funds," Journal of Finance, American Finance Association, vol. 43(4), pages 823-39, September. [Downloadable!] (restricted)
  8. Taggart, Robert A, Jr & Greenbaum, Stuart I, 1978. "Bank Capital and Public Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 158-69, May. [Downloadable!] (restricted)
  9. Black, Fischer & Miller, Merton H & Posner, Richard A, 1978. "An Approach to the Regulation of Bank Holding Companies," Journal of Business, University of Chicago Press, vol. 51(3), pages 379-412, July. [Downloadable!] (restricted)
  10. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Information Reusability, Competition and Bank Asset Quality," Finance 0411049, EconWPA. [Downloadable!]
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  11. Bhattacharya, Sudipto, 1982. " Aspects of Monetary and Banking Theory and Moral Hazard," Journal of Finance, American Finance Association, vol. 37(2), pages 371-84, May. [Downloadable!] (restricted)
  12. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January. [Downloadable!] (restricted)
  13. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  14. Greenbaum, Stuart I. & Thakor, Anjan V., 1987. "Bank funding modes : Securitization versus deposits," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 379-401, September. [Downloadable!] (restricted)
  15. Deborah Lucas & Robert L. McDonald, 1987. "Bank Financing and Investment Decisions with Asymmetric Information," NBER Working Papers 2422, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
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  17. David Pyle, 1984. "Deregulation and deposit insurance reform," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 5-15. [Downloadable!]
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