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Compensating victims of bankrupted financial institutions: a law and economic analysis

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  • Robert J. Dijkstra
  • Michael G. Faure

Abstract

Purpose - The purpose of this paper is to understand the incentive effects of existing compensation mechanisms in case of the bankruptcy of a financial institution. Design/methodology/approach - The paper uses insights of law and economics to predict the effects of compensation mechanisms on the incentives of depositors, financial institutions, financial regulators and government. Findings - The paper shows that the current compensation system in The Netherlands will not provide sufficient incentives for all stakeholders to prevent the failure of a financial institution. Adjustments to this system are necessary to improve these incentives. Original/value - The paper examines for the first time the impact of different compensation mechanisms on the incentives of multiple stakeholders. It also shows how these mechanisms influence each other regarding their incentive generating capability. These findings offer important insights for policy makers.

Suggested Citation

  • Robert J. Dijkstra & Michael G. Faure, 2011. "Compensating victims of bankrupted financial institutions: a law and economic analysis," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 19(2), pages 156-173, May.
    • Handle: RePEc:eme:jfrcpp:v:19:y:2011:i:2:p:156-173
    DOI: 10.1108/13581981111123861
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    References listed on IDEAS

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    1. Oscar Couwenberg & Abe Jong, 2008. "Costs and recovery rates in the Dutch liquidation-based bankruptcy system," European Journal of Law and Economics, Springer, vol. 26(2), pages 105-127, October.
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    3. Asli Demirguc-Kunt & Edward J. Kane, 2002. "Deposit Insurance Around the Globe: Where Does It Work?," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 175-195, Spring.
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    5. Charles A.E. Goodhart, 2009. "The Regulatory Response to the Financial Crisis," Books, Edward Elgar Publishing, number 13514.
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    9. James B. Thomson, 1990. "Using market incentives to reform bank regulation and federal deposit insurance," Economic Review, Federal Reserve Bank of Cleveland, vol. 26(Q I), pages 28-40.
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    Keywords

    Torts; Compensation; Law; Economics;
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