Partial deposit insurance and moral hazard in banking

Li Gan, Grace W.Y. Wang
2013 International journal of commerce and management  
Countries with deposit insurances differ significantly on how much protection their insurance provides. We study the optimal coverage limit in a model of deposit insurance with capital requirements and risk sensitive premia to prevent moral hazard. Depositors have incentives to monitor the bank's risk taking behavior, thus threatening banks with withdrawals of deposits if necessary. We find that either banking regulations or market discipline is insufficient to reduce bank's risk. In addition,
more » ... ur numerical example explains the differences in coverage cross countries which agree with empirical evidence. We show that low income countries provide more generous insurance protection than higher income countries.
doi:10.1108/10569211311301411 fatcat:khr4gqiyfvec7pqsx3pcnqzgl4