An Incentive Approach to Banking Regulation

Journal Article (Journal Article)

We examine the optimal design of a risk‐adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank's assets (adverse selection), and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality (moral hazard). Under a socially optimal insurance scheme: (1) asset quality is below the first‐best level, (2) higher‐quality banks have larger asset bases and face lower capital adequacy requirements than lower‐quality banks, and (3) the probability of failure is equated across banks. 1993 The American Finance Association

Full Text

Duke Authors

Cited Authors


Published Date

  • January 1, 1993

Published In

Volume / Issue

  • 48 / 4

Start / End Page

  • 1523 - 1542

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.1993.tb04766.x

Citation Source

  • Scopus