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Deposit insurance, bank incentives, and the design of regulatory policy

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  • Paul H. Kupiec
  • James M. O'Brien

Abstract

This study analyzes alternative bank regulatory polices within a theoretical framework that can encompass many policy design issues. Consequences of generalizing banks' investment and financing opportunities for results in the existing literature are examined. Under costless equity issuance, a narrow banking requirement costlessly resolves moral hazard and insurance pricing problems addressed in the literature. With costly equity, minimum capital requirements can be effective but optimal policy design is complicated by its dependence on equity issuance costs, heterogeneous bank investment opportunities, and the information requirements these dependencies create. Incentive compatible policy mechanisms appear limited in their ability to resolve the information problems.

Suggested Citation

  • Paul H. Kupiec & James M. O'Brien, 1997. "Deposit insurance, bank incentives, and the design of regulatory policy," Finance and Economics Discussion Series 1998-10, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:1998-10
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    References listed on IDEAS

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    2. Kraft, Evan & Galac, Tomislav, 2007. "Deposit interest rates, asset risk and bank failure in Croatia," Journal of Financial Stability, Elsevier, vol. 2(4), pages 312-336, March.
    3. Sylvie Mathérat & Vitchett Oung, 2000. "Les modèles d’assurance des dépôts. Présentation du nouveau système en vigueur en France," Revue d'Économie Financière, Programme National Persée, vol. 60(5), pages 225-236.
    4. 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.
    5. Kane, Edward J., 2006. "Inadequacy of nation-based and VaR-based safety nets in the European Union," The North American Journal of Economics and Finance, Elsevier, vol. 17(3), pages 375-387, December.
    6. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.
    7. Knorr Andreas, 1999. "Staatliche Bankenaufsicht – eine effiziente Institution?," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 50(1), pages 345-370, January.
    8. Arturo Estrella, 1998. "The Future of Regulatory Capital: General Principles and Specific Proposals," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(IV), pages 599-616, December.
    9. Sylvie Mathérat & Vitchett Oung, 2000. "An Overview of France’s New Deposit Insurance System," Revue d'Économie Financière, Programme National Persée, vol. 60(5), pages 221-232.
    10. Robert P. Gray, 2004. "Australia's Implicit Deposit Insurance — Should It Be Reconsidered?," Australian Accounting Review, CPA Australia, vol. 14(32), pages 41-52, March.
    11. Evan Kraft, 2006. "How Competitive Is Croatia's Banking System?," Working Papers 14, The Croatian National Bank, Croatia.

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    Deposit insurance; Bank supervision;

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