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Which Banks Choose Deposit Insurance? Evidence of Adverse Selection and Moral Hazard in a Voluntary Insurance System

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  • Wheelock, David C
  • Kumbhakar, Subal C

Abstract

This article investigates adverse selection and moral hazard in the voluntary deposit insurance system of Kansas, which operated from 1909 to 1929. Regulations were imposed to limit risk-taking and membership was made voluntary to assuage objections that insurance forces conservative banks to protect depositors of high-risk institutions. The authors find, however, that risk-prone banks were the most likely to join the system at its inception. Using a simultaneous equations model, they also detect both adverse selection and moral hazard behavior throughout the system's first ten years. Copyright 1995 by Ohio State University Press.

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  • Wheelock, David C & Kumbhakar, Subal C, 1995. "Which Banks Choose Deposit Insurance? Evidence of Adverse Selection and Moral Hazard in a Voluntary Insurance System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 186-201, February.
    • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:186-201
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