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Optimal Regulation of a Fully Insured Deposit Banking System

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  • Freixas, Xavier
  • Gabillon, Emmanuelle

Abstract

We analyze risk sensitive incentive compatible deposit insurance in the presence of private information when the market value of deposit insurance can be determined using Merton's (1977) formula. We show that, under the assumption that transferring funds from taxpayers to financial institutions has a social cost, the optimal regulation combines different levels of capital requirements combined with decreasing premia on deposit insurance. On the other hand, it is never efficient to require the banks to hold riskless assets. Finally, chartering banks is necessary in order to decrease the cost of asymmetric information. Copyright 1999 by Kluwer Academic Publishers

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  • Freixas, Xavier & Gabillon, Emmanuelle, 1999. "Optimal Regulation of a Fully Insured Deposit Banking System," Journal of Regulatory Economics, Springer, vol. 16(2), pages 111-134, September.
    • Handle: RePEc:kap:regeco:v:16:y:1999:i:2:p:111-34
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    Cited by:

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    2. Dag Morten Dalen & Trond Olsen, 2003. "Regulatory Competition and Multi-national Banking," CESifo Working Paper Series 971, CESifo.
    3. Evans Darko & Nadia Saghi-Zedek & Gervais Thenet, 2025. "Technical and economic efficiency measurement of African commercial banks using data envelopment analysis (DEA) [Mesure de l'efficacité technique et économique des banques commerciales africaines à," Post-Print hal-04613082, HAL.
    4. Sebastián Nieto Parra, 2005. "The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks," Post-Print hal-01020776, HAL.
    5. Xavier Freixas & Anthony M. Santomero, 2002. "An overall perspective on banking regulation," Working Papers 02-1, Federal Reserve Bank of Philadelphia.
    6. Evanoff, Douglas D. & Jagtiani, Julapa A. & Nakata, Taisuke, 2011. "Enhancing market discipline in banking: The role of subordinated debt in financial regulatory reform," Journal of Economics and Business, Elsevier, vol. 63(1), pages 1-22.
    7. Saadaoui, Zied, 2008. "Capital standards and banking stability in emerging countries: an empirical approach," MPRA Paper 25464, University Library of Munich, Germany.
    8. repec:spo:wpmain:info:hdl:2441/810 is not listed on IDEAS
    9. Georges Dionne, 2003. "The Foundations of Banks' Risk Regulation: a Review of the Literature," Cahiers de recherche 0346, CIRPEE.
    10. repec:cte:dbrepe:db040403 is not listed on IDEAS
    11. Arturo Estrella, 2004. "Bank Capital and Risk: Is Voluntary Disclosure Enough?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 145-160, October.
    12. Sebastián Nieto, 2005. "The Macroeconomic Implications of the New Banking Capital Regulation in Emerging Markets: A Duopoly Model Adapted to Risk-Averse Banks," Revista de Economía del Rosario, Universidad del Rosario, June.
    13. Alina MANTA & Roxana BADÎRCEA, 2015. "Empirical Study on the Relationship between Efficiency, Capital and Risk into the Banking System of Romania," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(17), pages 58-67, December.
    14. Franco Fiordelisi & David Marques & Phil Molyneux, 2009. "Efficiency and Risk-Taking in European Banking," Working Papers 09004, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    15. repec:hal:spmain:info:hdl:2441/810 is not listed on IDEAS
    16. Alkis Georgiadis-Harris & Maxi Guennewig, 2023. "Bank Resolution, Deposit Insurance, and Fragility," CRC TR 224 Discussion Paper Series crctr224_2023_477, University of Bonn and University of Mannheim, Germany.
    17. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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