Deposit Insurance and Subsidized Recapitalizations

Morrison, Alan and White, Lucy (2011) Deposit Insurance and Subsidized Recapitalizations. Journal of Banking & Finance, 35 (12). pp. 3400-3416.


Deposit insurance schemes are becoming increasingly popular around the world and yet there is little understanding of how they should be designed and what their consequences are. In this paper we provide a new rationale for the provision of deposit insurance. We analyse a model in which agents choose between depositing their funds with banks and placing them in a less productive self-managed project. Bankers have valuable but costly project management skills and the banking sector exhibits both adverse selection and moral hazard. Depositors do not fully account for the social benefits accruing from bank management of projects and so too few deposits are made in equilibrium. The regulator can correct this market failure by providing deposit insurance to encourage deposits. Contrary to received opinion, we find that deposit insurance should be funded not by bankers or depositors but through general taxation.

Item Type: Article
Keywords: deposit insurance; bank regulation; adverse selection; moral hazard; finance
Subject(s): Corporate reputation
Centre: Oxford University Centre for Corporate Reputation
Date Deposited: 20 Feb 2012 17:36
Last Modified: 01 Mar 2017 10:31
Funders: N/A

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