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Article: Which banks choose deposit insurance? Evidence of adverse selection and moral hazard in a voluntary insurance system. (study of Kansas banking insurance system)
- Article from:
- Journal of Money, Credit & Banking
- Article date:
- February 1, 1995
- Author:
CopyrightCOPYRIGHT 1995 Ohio State University Press. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Many economists have identified federal deposit insurance as an important contributor to the large number of bank and savings and loan failures in recent years.(1) the extent of insurance coverage, depositors have little or no incentive to demand risk premia on deposit interest rates, and therefore a bank's cost of funds does not increase proportionally with its insolvency risk. Deposit insurance subsidizes risk-taking, therefore, creating a "moral hazard" in that banks with insured deposits will find it optimal to assume more risk than they would otherwise.(2) In recent years increased competition and liability deregulation have both encouraged and enabled depository ...