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Do higher solvency ratios reduce the costs of bailing out insured banks?

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  • Robert K. Eastwood

    (School of Social Sciences, University of Sussex, UK)

Abstract

The relationship between solvency constraints and bank behaviour in the presence of fixed rate deposit insurance is investigated. A rise in the minimum solvency ratio does not necessarily reduce the adverse consequences of moral hazard: bank efficiency may fall and expected bailout costs may rise. Such outcomes are possible even if credit risk is purely systemic. Similar results obtain in respect of level increases in bank capital, tangible or intangible, although in this case purely systemic risk excludes perverse outcomes. Copyright © 2003 John Wiley & Sons, Ltd.

Suggested Citation

  • Robert K. Eastwood, 2004. "Do higher solvency ratios reduce the costs of bailing out insured banks?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 39-48.
    • Handle: RePEc:ijf:ijfiec:v:9:y:2004:i:1:p:39-48
    DOI: 10.1002/ijfe.220
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    References listed on IDEAS

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