Fairly Priced Deposit Insurance, Incentive Compatible Regulations and Bank Asset Choices

THE GENEVA PAPERS ON RISK AND INSURANCE THEORY, Vol. 21 No. 1, June 1996

Posted: 13 May 1998

See all articles by Suk Heun Yoon

Suk Heun Yoon

Korea Institute of Finance

Sumon C. Mazumdar

Law and Economics Consulting Group (LECG), LLC; University of California, Berkeley - Haas School of Business

Abstract

This paper provides incentive compatible regulations that support fairly priced deposit insurance in a competitive banking industry. If informational asymmetry exists between the regulator and banks regarding loan quality, but the regulator can observe actual loan rates charged, then imposing a capital requirement schedule that leads market loan rates to decrease in loan quality is shown to be incentive compatible. Competition in the loan market induces banks to be indifferent to all loans that satisfy a minimum acceptable quality and reject all riskier loans. The regulator could reduce the banking industry's riskiness by imposing stricter capital requirements that increase this minimum quality.

JEL Classification: G21

Suggested Citation

Yoon, Suk Heun and Mazumdar, Sumon C., Fairly Priced Deposit Insurance, Incentive Compatible Regulations and Bank Asset Choices. THE GENEVA PAPERS ON RISK AND INSURANCE THEORY, Vol. 21 No. 1, June 1996, Available at SSRN: https://ssrn.com/abstract=7556

Suk Heun Yoon

Korea Institute of Finance

4-1 Myung-dong 1-ga
Seoul 100-021
Korea

Sumon C. Mazumdar (Contact Author)

Law and Economics Consulting Group (LECG), LLC ( email )

2000 Powell Street, Suite 600
Emeryville, CA 94608
United States
510-450-5493 (Phone)

University of California, Berkeley - Haas School of Business

Finance Department
Berkeley, CA 94720
United States

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