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http://hdl.handle.net/2451/26679
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| Title: | Can Delegating Bank Regulation to Market Forces Really Work? |
| Authors: | Nagarajan, S.
Sealey, C.W. |
| Issue Date: | Feb-1997 |
| Series/Report no.: | FIN-97-008 |
| Abstract: | A major theme in the literature on bank regulation is that greater
reliance on market forces can help alleviate the moral hazard problem
inherent in government sponsored deposit insurance. Proposals include
minimum requirements on (1) uninsured subordinated debt financing
(either fixed-term or with option-type features), and (2) private
co-insurance on deposits. Such policies amount to delegating the
responsibility for bank regulation to various private-sector
claimholders. Our results show that, in general, such delegation (even
if the claims include option-type features) is at best ineffective in
lowering bank risk, at least within the present framework of
deposit-taking institutions. We also show, however, that there are
alternative mechanisms that will minimize regulatory costs, alleviate
the moral hazard problem, and achieve first-best. But, the regulator
(deposit insurer) must be an integral part of any solution; thus, such
solutions are not attributable to market discipline. |
| URI: | http://hdl.handle.net/2451/26679 |
| Appears in Collections: | Finance Working Papers
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