Deposit Insurance, Moral Hazard and Market Monitoring
Reint Gropp () and
Review of Finance, 2004, vol. 8, issue 4, 571-602
The paper analyses the relationship between deposit insurance, debt-holder monitoring, and risk taking. In a stylised banking model we show that deposit insurance may reduce moral hazard, if deposit insurance credibly leaves out non-deposit creditors. Testing the model using EU bank level data yields evidence consistent with the model, suggesting that explicit deposit insurance may serve as a commitment device to limit the safety net and permit monitoring by uninsured subordinated debt holders. We further find that credible limits to the safety net reduce risk taking of smaller banks with low charter values and sizeable subordinated debt shares only. However, we also find that the introduction of explicit deposit insurance tends to increase the share of insured deposits in banks' liabilities.
References: Add references at CitEc
Citations: View citations in EconPapers (58) Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
Working Paper: Deposit insurance, moral hazard and market monitoring (2004)
Working Paper: Deposit insurance, moral hazard, and market monitoring (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:oup:revfin:v:8:y:2004:i:4:p:571-602.
Ordering information: This journal article can be ordered from
Access Statistics for this article
Review of Finance is currently edited by Amit Goyal, Marcin Kacperczyk, Daniel Paravisini, Christine Parlour, Chris Parsons, Joel Peress and Geoffrey Tate
More articles in Review of Finance from European Finance Association Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press () and Christopher F. Baum ().