February 1998

Deposit Insurance, Bank Incentives, and the Design of Regulatory Policy

Paul H. Kupiec and James M. O'Brien

Abstract:

This study analyzes alternative bank regulatory polices within a theoretical framework that can encompass many policy design issues. Consequences of generalizing banks' investment and financing opportunities for results in the existing literature are examined. Under costless equity issuance, a narrow banking requirement costlessly resolves moral hazard and insurance pricing problems addressed in the literature. With costly equity, minimum capital requirements can be effective but optimal policy design is complicated by its dependence on equity issuance costs, heterogenous bank investment opportunities, and the information requirements these dependencies create. Incentive compatible policy mechanisms appear limited in their ability to resolve the information problems.

Full paper (420 KB Postscript)

Keywords: Banks, deposit insurance, incentive-compatible

PDF: Full Paper

Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.

Back to Top
Last Update: February 12, 2021