Deposit Insurance, Risk, and Market Power in Banking

Michael C Keeley

American Economic Review, 1990, vol. 80, issue 5, 1183-1200

Abstract: A fixed-rate deposit insurance system provides a moral hazard for excessive risk taking and is not viable absent regulation. Although the deposit insurance system appears to have worked remarkably well over most of its fifty-year history, major problems began to appear in the early 1980s. This paper tests the hypothesis that increases in competition caused bank charter values to decline, which in turn caused banks to increase default risk through increases in asset risk and reductions in capital. Copyright 1990 by American Economic Association.

Date: 1990
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