Optimal regulation of a fully insured deposit banking system

Xavier Freixas () and Emmanuelle Gabillon ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We analyze risk sensitive incentive compatible deposit insurance in the presence of private information when the market value of deposit insurance can be determined using Merton's (1997) formula. We show that, under the assumption that transferring funds from taxpayers to financial institutions has a social cost, the optimal regulation combines different levels of capital requirements combined with decreasing premia on deposit insurance. On the other hand, it is never efficient to require the banks to hold riskless assets, so that narrow banking is not efficient. Finally, chartering banks is necessary in order to decrease the cost of asymmetric information.

Keywords: Regulation; mechanism design; deposit insurance pricing; capital requirements (search for similar items in EconPapers)
JEL-codes: G13 G21 (search for similar items in EconPapers)
Date: 1996-05
New Economics Papers: this item is included in nep-pbe and nep-pub
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Related works:
Journal Article: Optimal Regulation of a Fully Insured Deposit Banking System (1999)
Working Paper: Optimal Regulation of a Fully Insured Deposit Banking System (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:175

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