Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking?
We investigate whether the introduction of fixed-price U.S. federal deposit insurance in 1933 increased the risk-taking of banks over the succeeding period. We examine 60 financial institutions and find that banks and trusts in general became more risky after the introduction of deposit insurance. However, a subset of well-performing banks appears to have reduced their risk. Deposit insurance also reduced the incentives of depositors to discriminate between ex ante weaker and stronger banks thus reducing depositor discipline in return for greater banking system stability.
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- Kane, Edward J & Wilson, Berry K, 1998.
"A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 30(3), pages 573-595, August.
- Edward J. Kane & Berry Wilson, 1998. "A contracting-theory intepretation of the origins of Federal deposit insurance," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 573-595.
- Edward J. Kane & Berry K. Wilson, 1998. "A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance," NBER Working Papers 6451, National Bureau of Economic Research, Inc.
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- Merton, Robert C, 1978.
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The Journal of Business,
University of Chicago Press, vol. 51(3), pages 439-452, July.
- Merton, Robert C., 1977. "On the cost of deposit insurance when there are surveillance costs," Working papers 903-77., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Schumacher, Liliana, 2000. "Bank runs and currency run in a system without a safety net: Argentina and the 'tequila' shock," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 257-277, August.
- Saunders, Anthony & Wilson, Berry, 1996. "Contagious Bank Runs: Evidence from the 1929-1933 Period," Journal of Financial Intermediation, Elsevier, vol. 5(4), pages 409-423, October.
- Saunders Anthony & Wilson Berry, 1995. "If History Could Be Rerun: The Provision and Pricing of Deposit Insurance in 1933," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 396-413, October.
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