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A Hierarchical Agency Model of Deposit Insurance

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Abstract

This paper develops a hierarchical agency model of deposit insurance. The main purpose is to undertake a game theoretic analysis of the consequences of deposit insurance schemes and their effects on monitoring incentives for banks. Using this simple framework, we analyze both risk- independent and risk-dependent premium schemes along with reserve requirement constraints. The results provide policymakers with not only a better understanding of the effects of deposit insurance on welfare and the problem of moral hazard, but also the policy implications implied in the design of de- posit insurance schemes. Our finding is consistent with the empirical research on depositor discipline.

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  • Jonathan Carroll & Shino Takayama, 2010. "A Hierarchical Agency Model of Deposit Insurance," Discussion Papers Series 410, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:410
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    3. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
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    6. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
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    9. Marcus, Alan J & Shaked, Israel, 1984. "The Valuation of FDIC Deposit Insurance Using Option-pricing Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 446-460, November.
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    12. Brewer, Elijah, III & Mondschean, Thomas H, 1994. "An Empirical Test of the Incentive Effects of Deposit Insurance: The Case of Junk Bonds at Savings and Loan Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 146-164, February.
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    15. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    16. 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.
    17. Ensar Yilmaz & Alovsat Muslumov, 2008. "Deposit insurance and moral hazard problem: the case of Turkish banking system," Applied Economics, Taylor & Francis Journals, vol. 40(16), pages 2147-2163.
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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