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Optimal Regulation of a Fully Insured Deposit Banking System

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  • Freixas, Xavier
  • Gabillon, Emmanuelle

Abstract

We 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 (1977) 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. Finally, chartering banks is necessary in order to decrease the cost of asymmetric information. Copyright 1999 by Kluwer Academic Publishers

Suggested Citation

  • Freixas, Xavier & Gabillon, Emmanuelle, 1999. "Optimal Regulation of a Fully Insured Deposit Banking System," Journal of Regulatory Economics, Springer, vol. 16(2), pages 111-134, September.
    • Handle: RePEc:kap:regeco:v:16:y:1999:i:2:p:111-34
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    Citations

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    Cited by:

    1. Dag Morten Dalen & Trond Olsen, 2003. "Regulatory Competition and Multi-national Banking," CESifo Working Paper Series 971, CESifo.
    2. Evans Darko & Nadia Zedek & Gervais Thenet, 2025. "Technical and economic efficiency measurement of African commercial banks using data envelopment analysis (DEA) [Mesure de l'efficacité technique et économique des banques commerciales africaines à l'aide de l'analyse de l'enveloppement des donnée," Post-Print hal-04613082, HAL.
    3. Hasman, Augusto & Samartín, Margarita, 2025. "Financial integration, contagion and policy implications," International Review of Economics & Finance, Elsevier, vol. 102(C).
    4. Saadaoui, Zied, 2008. "Capital standards and banking stability in emerging countries: an empirical approach," MPRA Paper 25464, University Library of Munich, Germany.
    5. Georges Dionne, 2003. "The Foundations of Banks' Risk Regulation: a Review of the Literature," Cahiers de recherche 0346, CIRPEE.
    6. Alkis Georgiadis-Harris & Maxi Guennewig, 2023. "Bank Resolution, Deposit Insurance, and Fragility," CRC TR 224 Discussion Paper Series crctr224_2023_477, University of Bonn and University of Mannheim, Germany.
    7. Arup Daripa & Simone Varotto, 2010. "Ex-Ante Versus Ex-Post Regulation Of Bank Capital," World Scientific Book Chapters, in: Lloyd P Blenman & Harold A Black & Edward J Kane (ed.), Banking And Capital Markets New International Perspectives, chapter 2, pages 29-58, World Scientific Publishing Co. Pte. Ltd..
    8. repec:spo:wpmain:info:hdl:2441/810 is not listed on IDEAS
    9. Samartín, Margarita, 2004. "Algunos temas relevantes en la teoría bancaria," DEE - Documentos de Trabajo. Economía de la Empresa. DB db040403, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    10. 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.
    11. Xavier Freixas & Anthony M. Santomero, 2002. "An overall perspective on banking regulation," Working Papers 02-1, Federal Reserve Bank of Philadelphia.
    12. Evanoff, Douglas D. & Jagtiani, Julapa A. & Nakata, Taisuke, 2011. "Enhancing market discipline in banking: The role of subordinated debt in financial regulatory reform," Journal of Economics and Business, Elsevier, vol. 63(1), pages 1-22.
    13. Arturo Estrella, 2004. "Bank Capital and Risk: Is Voluntary Disclosure Enough?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 145-160, October.
    14. João A. C. Santos, 2001. "Bank Capital Regulation in Contemporary Banking Theory: A Review of the Literature," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 10(2), pages 41-84, May.
    15. Sebastián Nieto Parra, 2005. "The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks," Post-Print hal-01020776, HAL.
    16. Alina MANTA & Roxana BADÎRCEA, 2015. "Empirical Study on the Relationship between Efficiency, Capital and Risk into the Banking System of Romania," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(17), pages 58-67, December.
    17. Franco Fiordelisi & David Marques & Phil Molyneux, 2009. "Efficiency and Risk-Taking in European Banking," Working Papers 09004, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

    More about this item

    JEL classification:

    • 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

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