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Partial Deposit Insurance and Moral Hazard in Banking

Li Gan () and Grace Wang

MPRA Paper from University Library of Munich, Germany

Abstract: Abstract: Countries with deposit insurances differ significantly on how much protection their insurance provides. We study the optimal coverage limit in a model of deposit insurance with capital requirements and risk sensitive premia to prevent moral hazard. Depositors have incentives to monitor the bank’s risk taking behavior, thus threatening banks with withdrawals of deposits if necessary. We find that either banking regulations or market discipline is insufficient to reduce bank’s risk. In addition, our numerical example explains the differences in coverage cross countries which agrees with empirical evidence. We show that low income countries provide more generous insurance protection than higher income countries.

Keywords: Depositor’s monitoring; moral hazard; optimal coverage, partial deposit insurance. (search for similar items in EconPapers)
JEL-codes: E65 G21 G28 (search for similar items in EconPapers)
Date: 2010-07-01
New Economics Papers: this item is included in nep-ban, nep-cta and nep-ias
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