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Regulatory Monitoring, Closure Costs and Bank Moral Hazard Behavior


  • Mazumdar, Sumon C


We theoretically analyze the efficacy of close regulatory monitoring and early bank closure policies, introduced by the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA), in reducing the FDIC's losses and curbing bank moral hazard behavior induced by mis-priced deposit insurance. Contrary to conventional wisdom we demonstrate that continuous bank monitoring and early closure may in fact exacerbate the moral hazard problem if bank shareholders face a penalty upon closure. Moreover, if reputational disincentives and monitoring costs prevent the regulator from implementing timely closure then the bank's moral hazard incentives are significantly altered. These results suggest several new policy implications. Copyright 1997 by Kluwer Academic Publishers

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  • Mazumdar, Sumon C, 1997. "Regulatory Monitoring, Closure Costs and Bank Moral Hazard Behavior," Journal of Regulatory Economics, Springer, vol. 12(3), pages 267-289, November.
  • Handle: RePEc:kap:regeco:v:12:y:1997:i:3:p:267-89

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    References listed on IDEAS

    1. Salkever, David S, 1970. "Public Utility Pricing and Output Under Risk: Comment," American Economic Review, American Economic Association, vol. 60(3), pages 487-488, June.
    2. Carlton, Dennis W, 1977. "Peak Load Pricing with Stochastic Demand," American Economic Review, American Economic Association, vol. 67(5), pages 1006-1010, December.
    3. De Vany, Arthur S, 1976. "Uncertainty, Waiting Time, and Capacity Utilization: A Stochastic Theory of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 523-541, June.
    4. John Tschirhart & Frank Jen, 1979. "Behavior of a Monopoly Offering Interruptible Service," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 244-258, Spring.
    5. Brown, Gardner, Jr & Johnson, M Bruce, 1969. "Public Utility Pricing and Output under Risk," American Economic Review, American Economic Association, vol. 59(1), pages 119-128, March.
    6. Meyer, Robert A, 1975. "Monopoly Pricing and Capacity Choice under Uncertainty," American Economic Review, American Economic Association, vol. 65(3), pages 326-337, June.
    7. Turvey, Ralph, 1970. "Public Utility Pricing and Output Under Risk: Comment," American Economic Review, American Economic Association, vol. 60(3), pages 485-486, June.
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    Cited by:

    1. Episcopos, Athanasios, 2008. "Bank capital regulation in a barrier option framework," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1677-1686, August.
    2. Lin, Jyh-Horng & Hung, Wei-Ming, 2013. "A barrier option framework for bank interest margin management under anticipatory regret aversion," Economic Modelling, Elsevier, vol. 33(C), pages 794-801.
    3. Chen, Shi & Lin, Ku-Jun, 2015. "Technology choice and bank performance with government capital injection under deposit insurance fund protection," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 162-174.

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