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Optimal Regulation of a Fully Insured Deposit Banking System

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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, 3-11) 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.

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Authors and Affiliations

  1. Universitat Pompeu Fabra C. Ramon Trias Fragas, 25-27, 08005, Barcelona, Spain

    Xavier Freixas

  2. Université Toulouse I GREMAQ, Manufacture des Tabacs, Bât F, 21 Allée de Brienne, 31000, Toulouse, France

    Emmanuelle Gabillon

Authors
  1. Xavier Freixas
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  2. Emmanuelle Gabillon
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Freixas, X., Gabillon, E. Optimal Regulation of a Fully Insured Deposit Banking System. Journal of Regulatory Economics 16, 111–134 (1999). https://doi.org/10.1023/A:1008139900120

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