Fairly Priced Deposit Insurance under Adverse Selection

Juha-Pekka Niinimäki
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Juha-Pekka Niinimäki: School of Business and Economics, University of Jyväskylä, Finland

Finnish Economic Papers, 2003, vol. 16, issue 1, 38-48

Abstract: Fair pricing of deposit insurance represents one of the most difficult problems of bank regulation. This paper introduces an incentive compatible mechanism such that fair (risk-based) deposit insurance premiums can be achieved under adverse selection. The deposit insurer screens banks by offering full insurance coverage for high-risk banks and partial coverage for low-risk banks. If deposit interest rates can be regulated, low-risk banks also obtain full coverage. The optimal solution may require dividing deposits into junior and senior deposits. More generally, our analysis connects deposit insurance with standard insurance theory.

JEL-codes: G21 G22 G28 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (1)

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