Deposit insurance, risk, and market power in banking

Michael C. Keeley

No 88-07, Working Papers in Applied Economic Theory from Federal Reserve Bank of San Francisco

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 50-year history, major problems began to appear in the early 1980s. This paper addresses the puzzle of why major problems began to arise in the early 1980s and not sooner. ; The hypothesis is 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. This hypothesis is tested using pooled cross section time-series data for the 1970-1986 period for a sample of 85 large bank holding companies.

Keywords: Risk; Deposit insurance; bank charters (search for similar items in EconPapers)
Date: 1988
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