Deposit Insurance, Capital Constraints, and Risk Taking by Banks
1994 (English)Report (Other academic)
The paper analyzes the moral hazard problem of the bank, which arises from the inability of claim holders to observe the bank's portfolio choice. The risk-incentive of debt is mitigated by diversification of the bank portfolio. It is shown that when the marginal source of funding of the bank is not deposits, but funds raised in the capital market, deposit insurance may induce the bank to take less risk rather than more. If deposit insurance is fairly priced, there is no scope for capital constraints, but, with a constant insurance premium, a capital requirement can reduce risk-taking by the bank.
Place, publisher, year, edition, pages
Stockholm: IIES , 1994. , 40 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 569
IdentifiersURN: urn:nbn:se:su:diva-41893OAI: oai:DiVA.org:su-41893DiVA: diva2:342804