Does Corporate Governance Matter in Deposit Insurance? Di and Moral Hazard in Joint Stock and Mutual Financial Intermediaries
CIRPEE Working Paper No. 0206
24 Pages Posted: 7 Mar 2003
Date Written: October 2002
In this paper, we analyze the differences of effects of a deposit insurance schemes on financial cooperative and joint stock banks risk taking. We develop a methodology which includes the specifics of the utility function for the financial cooperative and we compare the results to a similar profit maximizing joint stock bank. We find that the introduction of deposit insurance does in fact increase optimal risk level for the financial cooperative but less so than the stock bank. Thus, corporate governance does matter in the level of risk exposure of a deposit insurance scheme. Further, like in joint stock banks, this moral hazard can be curbed through incentives such as risk adjusted premias, risk adjusted regulatory capital and possibly reserve requirements.
Keywords: Deposit Insurance, Moral hazard, Financial cooperatives, Credit unions
JEL Classification: L3, G21, G22, G28
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