Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of conference participants
- 1 Introduction
- 2 Efficient governance structure: implications for banking regulation
- Discussion
- 3 Bank loan maturity and priority when borrowers can refinance
- Discussion
- 4 Stock markets and resource allocation
- Discussion
- 5 Informational capacity and financial collapse
- Discussion
- 6 Financial intermediation and economic development
- Discussion
- 7 Creditor passivity and bankruptcy: implications for economic reform
- Discussion
- 8 Enterprise debt and economic transformation: financial restructuring in Central and Eastern Europe
- Discussion
- 9 Bank regulation, reputation and rents: theory and policy implications
- Discussion
- 10 Relationship banking, deposit insurance and bank portfolio choice
- Discussion
- 11 Competition and bank performance: a theoretical perspective
- Discussion
- Index
Discussion
Published online by Cambridge University Press: 04 August 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of conference participants
- 1 Introduction
- 2 Efficient governance structure: implications for banking regulation
- Discussion
- 3 Bank loan maturity and priority when borrowers can refinance
- Discussion
- 4 Stock markets and resource allocation
- Discussion
- 5 Informational capacity and financial collapse
- Discussion
- 6 Financial intermediation and economic development
- Discussion
- 7 Creditor passivity and bankruptcy: implications for economic reform
- Discussion
- 8 Enterprise debt and economic transformation: financial restructuring in Central and Eastern Europe
- Discussion
- 9 Bank regulation, reputation and rents: theory and policy implications
- Discussion
- 10 Relationship banking, deposit insurance and bank portfolio choice
- Discussion
- 11 Competition and bank performance: a theoretical perspective
- Discussion
- Index
Summary
The paper by Boot and Greenbaum provides a careful and interesting analysis of bank regulation, and specifically of the moral hazard problems associated with deposit insurance. As such, it is especially welcome, and provides useful insights in the perspective of the forthcoming European Monetary System.
I shall first discuss the main issues that arise in this class of models and the way they are dealt with in the present paper. Then I shall briefly comment on policy implications.
Models of deposit insurance
A widespread conclusion, drawn in particular from the crisis of US Savings and Loan, is that fixed-rate deposit insurance creates perverse incentives favouring excessive risk-taking behaviour. This ‘moral hazard’ explanation of the crisis, at least in its current version, is however not fully convincing at first sight, and deserves further elaboration. Moral hazard arises whenever some insurance scheme, by protecting an agent against the consequences of inappropriate behaviour, alters the agent's incentives in an undesirable direction. The case of deposit insurance is clearly more complex, because the people insured – depositors – do not decide on the bank's portfolio composition, while the decision maker – the banker – is not insured. Perverse incentives, if any, must thus be indirect: the insurance provided to one party results in excessive risk taking by the other party.
The question, of course, is by which mechanism such incentives are transmitted. An obvious candidate is the price system. Specifically, should the market operate without regulation, excessive risk taking should raise the bank's funding costs, since depositors will exact a risk premium. Fixed-rate deposit insurance destroys this mechanism, since depositors bear no risk.
- Type
- Chapter
- Information
- Capital Markets and Financial Intermediation , pp. 286 - 291Publisher: Cambridge University PressPrint publication year: 1993