Optimal Regulation of a Fully Insured Deposit Banking System

Posted: 21 Apr 1998

See all articles by Gabillon Emmanuelle

Gabillon Emmanuelle

Bordeaux University

Xavier Freixas

Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: Undated


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 Mertonis (1977) 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.

JEL Classification: G22

Suggested Citation

Emmanuelle, Gabillon and Freixas, Xavier, Optimal Regulation of a Fully Insured Deposit Banking System (Undated). Available at SSRN: https://ssrn.com/abstract=7684

Gabillon Emmanuelle

Bordeaux University ( email )

Avenue Léon Duguit
Pessac, 33608

Xavier Freixas (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~freixas

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

HOME PAGE: http://www.econ.upf.es/~freixas/more/personal1.htm

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005

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