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Creator: Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 679 Abstract:
Prior to 1861, several U.S. states established bank liability insurance schemes. One type was an insurance fund. Member banks paid into a state-run fund that paid bank creditors’ losses. A second scheme was a mutual guarantee system. Member banks were legally responsible for the liabilities of any insolvent bank. This paper’s hypothesis is that the moral hazard problem was controlled under a scheme to the degree that member banks had the power and incentive to control or modify others’ risk-taking behavior. Schemes that gave member banks both strong incentives and power were able to control the moral hazard problem better than schemes in which one or both features were weak. Empirical evidence on bank failures and losses on banks’ asset portfolios is consistent with this hypothesis.
Mot-clé: Banknotes, Moral hazard, and Deposit insurance Assujettir: N21 - Economic History: Financial Markets and Institutions: U.S.; Canada: Pre-1913 and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Boyd, John H., Chang, Chun, and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 593 Abstract:
This paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs, the way in which they are priced and the way in which they fund revenue shortfalls. We show that the central issue is how the government will make up any FDIC losses. Under one scheme for making up the losses, we show that FDIC policy is irrelevant: it does not matter what premium is charged, nor does it matter how big FDIC losses are. Under another scheme, all that matters is the magnitude of the losses. And there is no presumption that small losses are “good.” We also show that multiple equilibria can be observed and Pareto ranked. Some economies may be “trapped” in equilibria with inefficient financial systems. Our analysis provides counterexamples to the following propositions. (1) Actuarially fair pricing of deposit insurance is always desirable. (2) Implicit FDIC subsidization of banks through deposit insurance is always undesirable. (3) “Large” FDIC losses are necessarily symptomatic of a poorly designed deposit insurance system.
Mot-clé: Deposit insurance Assujettir: G18 - General Financial Markets: Government Policy and Regulation, G00 - Financial Economics: General, and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Smith, Bruce D. (Bruce David), 1954-2002 and Wang, Cheng Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 574 Abstract:
We consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs. The insurer wishes to minimize the expected cost of providing these agents a certain expected utility level. We characterize the optimal contract between the insurer and the insured agents. We then apply the analysis to the provision of deposit insurance. Our results suggest—in a deposit insurance context—that it may be optimal to utilize the discount window early on, and to make deposit insurance payments only later, or not at all.
Mot-clé: Deposit insurance and Bank supervision Assujettir: G20 - Financial Institutions and Services: General and E58 - Central Banks and Their Policies
Creator: Miller, Preston J. and Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 494 Abstract:
This paper investigates the macroeconomic and welfare effects of a particular public finance decision. That decision was to use debt rather than current taxation to finance deposit insurance payments related to the savings and loan debacle. We find that this decision could have significantly raised real interest rates and affected welfare. The analysis is conducted in a dynamic, open-economy, monetary general equilibrium model in which parameters are set based on empirical observations.
Mot-clé: Savings and loan, Welfare, Real interest rates, Deposit insurance, Government debt, Public finance, Taxation, and S & L Assujettir: H63 - National Debt; Debt Management; Sovereign Debt and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 370 Abstract:
The Diamond-Dybvig model of banking (Journal of Political Economy, 1983) is amended by introducing communication barriers—these being implicit in their model and in most explanations of why people hold so-called liquid assets. These barriers imply the sequential-service constraint that Diamond and Dybvig imposed on private intermediation and have other implications: infeasibility of the policy that Diamond and Dybvig identify with deposit insurance and desirability of dependence of the realized return on deposits on the random order of withdrawals.
Mot-clé: Deposit insurance, Sequential service constraint, Communication barrier, Diamond, Liquid assets, Banks, and Dybvig Assujettir: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages