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Does Corporate Governance Matter in Deposit Insurance? DI and Moral Hazard in Joint Stock and Mutual Financial Intermediaries

  • Fischer, Klaus P.
  • Fournier, Eric M.

In this paper, we analyze the differences of effects of a deposit insurance schemes on financial cooperative and joint stock banks risk taking. We develop a methodology which includes the specifics of the utility function for the financial cooperative and we compare the results to a similar profit maximizing joint stock bank. We find that the introduction of deposit insurance does in fact increase optimal risk level for the financial cooperative but less so than the stock bank. Thus, corporate governance does matter in the level of risk exposure of a deposit insurance scheme. Further, like in joint stock banks, this moral hazard can be curbed through incentives such as risk adjusted premias, risk adjusted regulatory capital and possibly reserve requirements.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0206.

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Date of creation: 2002
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Handle: RePEc:lvl:lacicr:0206
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  1. Karels, Gordon V. & McClatchey, Christine A., 1999. "Deposit insurance and risk-taking behavior in the credit union industry," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 105-134, January.
  2. Hassan, M. Kabir & Karels, Gordon V. & Peterson, Manfred O., 1994. "Deposit insurance, market discipline and off-balance sheet banking risk of large U.S. commercial banks," Journal of Banking & Finance, Elsevier, vol. 18(3), pages 575-593, May.
  3. Lee, Wai Sing & Kwok, Chuck C. Y., 2000. "Domestic and international practice of deposit insurance: a survey," Journal of Multinational Financial Management, Elsevier, vol. 10(1), pages 29-62, January.
  4. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA.
  5. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  6. Tybout, James R, 1984. "Interest Control and Credit Allocation in Developing Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 474-87, November.
  7. Oliver Hart & John Moore, 1996. "The Governance of Exchanges: Members' Co-operatives Versus Outside Ownership," STICERD - Theoretical Economics Paper Series /1996/292, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  8. Kendall, Sarah B. & Levonian, Mark E., 1991. "A simple approach to better deposit insurance pricing," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 999-1018, September.
  9. Smith, Donald J & Cargill, Thomas F & Meyer, Robert A, 1981. "An Economic Theory of a Credit Union," Journal of Finance, American Finance Association, vol. 36(2), pages 519-28, May.
  10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  11. Kendall, Sarah B., 1992. "A note on the existence and characteristics of fair deposit insurance premia," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 289-297, April.
  12. Kambhu, John, 1990. "Concealment of Risk and Regulation of Bank Risk Taking," Journal of Regulatory Economics, Springer, vol. 2(4), pages 397-414, December.
  13. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
  14. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
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