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- Title
An Incentive Approach to Banking Regulation.
- Authors
Giammarino, Ronald M.; Lewis, Tracy R.; Sappington, David E. M.
- Abstract
We examine the optimal design of a risk-adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank's assets (adverse selection), and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality (moral hazard). Under a socially optimal insurance scheme: (1) asset quality is below the first-best level, (2) higher-quality banks have larger asset bases and face lower capital adequacy requirements than lower-quality banks, and (3) the probability of failure is equated across banks.
- Subjects
DEPOSIT insurance; ADVERSE selection (Insurance); MORAL hazard; REGULATED industries; LABOR incentives; MATHEMATICAL models of finance; FINANCIAL risk management; PROFITABILITY; EFFICIENT market theory; INSURANCE business activities of banks
- Publication
Journal of Finance (Wiley-Blackwell), 1993, Vol 48, Issue 4, p1523
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1993.tb04766.x