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An Optimal Scheme For Injecting Public Funds Under The Moral Hazard Incentive For Banks

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  • HIROSHI OSANO

Abstract

I consider whether the injection of cash funds into a bank through the purchase of securities together with a bank closure policy can be designed as a strong incentive instrument for preventing the bank from taking moral hazard action in the presence of deposit insurance. Under certain conditions, the regulator's optimal policy can be to inject new cash funds into a bank through the purchase of securities, even though there are no bankruptcy costs. Furthermore, the regulator may transform the private bank into a government‐owned bank. However, this kind of injection policy cannot be independent of the bank closure policy.

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  • Hiroshi Osano, 2005. "An Optimal Scheme For Injecting Public Funds Under The Moral Hazard Incentive For Banks," The Japanese Economic Review, Japanese Economic Association, vol. 56(2), pages 223-247, June.
    • Handle: RePEc:bla:jecrev:v:56:y:2005:i:2:p:223-247
    DOI: 10.1111/j.1468-5876.2005.00305.x
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    1. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
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    2. Hauck, Achim & Vollmer, Uwe, 2013. "Emergency liquidity provision to public banks: Rules versus discretion," European Journal of Political Economy, Elsevier, vol. 32(C), pages 193-204.
    3. Hauck, Achim & Neyer, Ulrike & Vieten, Thomas, 2015. "Reestablishing stability and avoiding a credit crunch: Comparing different bad bank schemes," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 116-128.

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