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Regulatory Monitoring, Closure Costs and Bank Moral Hazard Behavior

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  • Mazumdar, Sumon C

Abstract

We theoretically analyze the efficacy of close regulatory monitoring and early bank closure policies, introduced by the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA), in reducing the FDIC's losses and curbing bank moral hazard behavior induced by mis-priced deposit insurance. Contrary to conventional wisdom we demonstrate that continuous bank monitoring and early closure may in fact exacerbate the moral hazard problem if bank shareholders face a penalty upon closure. Moreover, if reputational disincentives and monitoring costs prevent the regulator from implementing timely closure then the bank's moral hazard incentives are significantly altered. These results suggest several new policy implications. Copyright 1997 by Kluwer Academic Publishers

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  • Mazumdar, Sumon C, 1997. "Regulatory Monitoring, Closure Costs and Bank Moral Hazard Behavior," Journal of Regulatory Economics, Springer, vol. 12(3), pages 267-289, November.
    • Handle: RePEc:kap:regeco:v:12:y:1997:i:3:p:267-89
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    Cited by:

    1. Marcus Miller & Pongsak Luangaram, 1998. "Financial crisis in East Asia: bank runs, asset bubbles and antidotes," National Institute Economic Review, National Institute of Economic and Social Research, vol. 165(1), pages 66-82, July.
    2. Episcopos, Athanasios, 2008. "Bank capital regulation in a barrier option framework," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1677-1686, August.
    3. Lin, Jyh-Horng & Hung, Wei-Ming, 2013. "A barrier option framework for bank interest margin management under anticipatory regret aversion," Economic Modelling, Elsevier, vol. 33(C), pages 794-801.
    4. Chuen-Ping Chang & Shi Chen, 2015. "Bank Interest Margin and Default Risk under Basel III Capped Capital Adequacy Accord and Regulatory Deposit Insurance Fund Protection," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(1), pages 14-21, January.
    5. Thomas Barnebeck Andersen & Thomas Harr, 2008. "Franchise Values, Regulatory Monitoring, and Capital Requirements in Optimal Bank Regulation," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(1), pages 81-101, January.
    6. Chen, Shi & Lin, Ku-Jun, 2015. "Technology choice and bank performance with government capital injection under deposit insurance fund protection," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 162-174.

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