The Incentive-Compatible Design of Deposit Insurance and Bank Failure Resolution

Thorsten Beck

Chapter 4 in Who Pays for Bank Insolvency?, 2004, pp 118-141 from Palgrave Macmillan

Abstract: Abstract Deposit insurance and bank failure resolution are important parts of the financial safety net and an incentive-compatible design of both can minimize the probability and cost of financial fragility. The absence of explicit deposit insurance or the proper design of an explicit scheme can encourage large depositors and creditors to monitor banks and exert market discipline, thus reducing the risk of aggressive risk-taking by banks and thus the risk of financial fragility. Effective and timely resolution of failed banks can decrease the cost that bank failures can cause to the banking system. An incentive-compatible design of bank failure resolution can contain aggressive risk-taking by banks and thus reduce the probability of bank failures ex-ante.

Keywords: Moral Hazard; Deposit Insurance; Saving Bank; Bank Failure; Market Discipline (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-52391-3_5

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DOI: 10.1057/9780230523913_5

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