Deposit guarantee evaluation and incentives analysis in a mutual guarantee system

Maria Elena De Giuli, Mario Alessandro Maggi and Francesco Maria Paris

Journal of Banking & Finance, 2009, vol. 33, issue 6, pages 1058-1068

Abstract: This paper analyzes how the deposit guarantee value affects the risk incentives in a mutual guarantee system. We liken the guarantee's value to that of a European-style contingent claims portfolio. The main feature emerging from our model is that a mutual guarantee system would give banks an adverse incentive to increase riskiness. To mitigate this incentive, we introduce a regulatory provision modelled using a path-dependent contingent claim. By comparing the mutual guarantee system with a non-mutual one, we show that the former is less expensive, but implies higher adverse incentives for the banks, especially for undercapitalized institutions.

Keywords: Deposit; insurance; Mutual; guarantee; system; Incentives; evaluation; Option; pricing; Forbearance (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:6:p:1058-1068

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