IDEAS home Printed from https://ideas.repec.org/p/chb/bcchwp/474.html
   My bibliography  Save this paper

Deposit Insurance, Moral Hazard and the Risk of Runs

Author

Listed:
  • Nancy Silva

Abstract

The effectiveness of deposit insurance in eliminating panic runs varies with the size of coverage and the degree of supervisory involvement of the agency in charge of insurance. When the agency is not involved in the supervision of banks, partial insurance preserves the monitoring role of depositors and reduces the region for which runs occur, but it is unable of completely eliminating them. When the agency has a high degree of supervisory involvement, even with partial insurance panic runs disappear as the regulator's signal becomes more precise. However, the smaller the protection offered to depositors, the higher is forbearance. Deposit insurance induces moral hazard by increasing the equilibrium value of the demand deposit contract in the interim period, though this effect seems to be smaller under a broad mandate. Therefore, a scheme where the insurance agency has more supervisory involvement should be preferred.

Suggested Citation

  • Nancy Silva, 2008. "Deposit Insurance, Moral Hazard and the Risk of Runs," Working Papers Central Bank of Chile 474, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:474
    as

    Download full text from publisher

    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_474.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:bla:jfinan:v:44:y:1989:i:5:p:1313-33 is not listed on IDEAS
    2. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    3. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
    4. Xavier Freixas, 1999. "Optimal Bail Out Policy, Conditionality and Creative Ambiguity," FMG Discussion Papers dp327, Financial Markets Group.
    5. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
    6. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May.
    7. Ongena, Steven & Smith, David C. & Michalsen, Dag, 1999. "Distressed relationships: Lessons from the Norwegian banking crisis," CFS Working Paper Series 2000/01, Center for Financial Studies (CFS).
    8. Freixas, Xavier, 1999. "Optimal Bail-Out, Conditionality and Creative Ambiguity," CEPR Discussion Papers 2238, C.E.P.R. Discussion Papers.
    9. Stephen D. Williamson, 1998. "Discount Window Lending and Deposit Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 246-275, January.
    10. Alonso, Irasema, 1996. "On avoiding bank runs," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 73-87, February.
    11. repec:bla:jfinan:v:53:y:1998:i:4:p:1245-1284 is not listed on IDEAS
    12. Xavier Freixas, 1999. "Optimal bail out policy, conditionality and constructive ambiguity," Economics Working Papers 400, Department of Economics and Business, Universitat Pompeu Fabra.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:zbw:bofrdp:urn:nbn:fi:bof-201504131153 is not listed on IDEAS
    2. Romero-Ramírez, Erick & Venegas-Martínez, Francisco & Trejo-García, José Carlos, 2019. "Revisitando los modelos de Birnbaum-Chávez y de Diamond-Dybvig sobre corridas bancarias ¿Las corridas dependen sólo de fundamentos económicos o también de factores psicológicos?," eseconomía, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 14(50), pages 7-40, Primer se.
    3. repec:zbw:bofrdp:2015_010 is not listed on IDEAS
    4. Kiema, Ilkka & Jokivuolle, Esa, 2015. "Why are bank runs sometimes partial?," Research Discussion Papers 10/2015, Bank of Finland.
    5. repec:bof:bofrdp:urn:nbn:fi:bof-201504131153 is not listed on IDEAS
    6. Kiema, Ilkka & Jokivuolle, Esa, 2015. "Why are bank runs sometimes partial?," Bank of Finland Research Discussion Papers 10/2015, Bank of Finland.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Haizhou Huang & Chenggang Xu, 1999. "Financial Institutions, Financial Contagion, and Financial Crises," CID Working Papers 21, Center for International Development at Harvard University.
    2. Rob Nijskens & Sylvester Eijffinger, 2011. "The Lender of Last Resort: Liquidity Provision versus the Possibility of Bailout," Chapters, in: Sylvester Eijffinger & Donato Masciandaro (ed.), Handbook of Central Banking, Financial Regulation and Supervision, chapter 4, Edward Elgar Publishing.
    3. Ma, Chang & Nguyen, Xuan-Hai, 2021. "Too big to fail and optimal regulation," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 747-758.
    4. Bosma, Jakob J., 2016. "Dueling policies: Why systemic risk taxation can fail," European Economic Review, Elsevier, vol. 87(C), pages 132-147.
    5. VERMEULEN, Glen & KORT, Peter, 2014. "Real options and bank bailouts: How uncertainty affects optimal bank bailout policy," Working Papers 2014021, University of Antwerp, Faculty of Business and Economics.
    6. Kilian Huber, 2021. "Are Bigger Banks Better? Firm-Level Evidence from Germany," Journal of Political Economy, University of Chicago Press, vol. 129(7), pages 2023-2066.
    7. Naqvi, Hassan, 2015. "Banking crises and the lender of last resort: How crucial is the role of information?," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 20-29.
    8. Kornai, János & Maskin, Eric & Roland, Gérard, 2022. "A puha költségvetési korlát - I [The soft budget constraint I]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 75-93.
    9. Nosal, Jaromir B. & Ordoñez, Guillermo, 2016. "Uncertainty as commitment," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 124-140.
    10. Nier, Erlend & Baumann, Ursel, 2006. "Market discipline, disclosure and moral hazard in banking," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 332-361, July.
    11. Rafael Repullo, 2000. "Who should act as lender of last resort? an incomplete contracts model," Proceedings, Federal Reserve Bank of Cleveland, pages 580-610.
    12. Ratnovski, Lev, 2009. "Bank liquidity regulation and the lender of last resort," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 541-558, October.
    13. Blaise Gadanecz & Kostas Tsatsaronis & Yener Altunbas, 2008. "External support and bank behaviour in the international syndicated loan market," BIS Working Papers 265, Bank for International Settlements.
    14. Eijffinger, Sylvester & Nijskens, Rob, 2011. "Complementing Bagehot: Illiquidity and insolvency resolution," CEPR Discussion Papers 8603, C.E.P.R. Discussion Papers.
    15. Timothy C. Irwin, 2016. "Getting the Dog to Bark: Disclosing Fiscal Risks from the Financial Sector," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-17, June.
    16. Morten Balling & Peter Egger & Ernest Gnan & Axel A. Weber & Harald W. Stieber & Stavros Vourloumis & António Afonso & João Tovar Jalles & Franco Bruni & André van Poeck & Maartje Wijffelaars & Séveri, 2013. "States, Banks, and the Financing of the Economy: Fiscal Policy and Sovereign Risk Perspectives," SUERF Studies, SUERF - The European Money and Finance Forum, number 2013/2 edited by Morten Balling & Peter Egger & Ernest Gnan, May.
    17. Xu, Cheng-Gang & Maskin, Eric, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers.
    18. Ulrich Erlenmaier & Hans Gersbach, 2001. "The Funds Concentration Effect and Discriminatory Bailout," CESifo Working Paper Series 591, CESifo.
    19. Nijskens, Rob, 2014. "A sheep in wolf’s clothing: Can a central bank appear tougher than it is?," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 94-103.
    20. Yaron Leitner, 2004. "Financial networks: contagion, commitment, and private sector bailouts," Working Papers 02-9, Federal Reserve Bank of Philadelphia.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:474. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alvaro Castillo (email available below). General contact details of provider: https://edirc.repec.org/data/bccgvcl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.