Deposit insurance and the discount window: pricing under asymmetric information

Article Abstract:

Increased banking regulation with regard to insurance on bank deposits and the banking discount window is discussed. Analysis indicates that: (1) if deposit insurance pricing determinations fail to properly account for informational asymmetry, banks do not tend to operate in a risk compatible way, (2) allocating a price to the government's exposure (through deposit insurance) to the risk-taking activities of banks entails the incorporation of a discount window, and (3) government loans of money to banks, through the use of the discount window, are difficult to assess in terms of propriety, since bank illiquidity and bank insolvency, although thought to be distinct, are difficult to distinguish. The revision of banking regulations will have to integrate deposit insurance pricing with discount window policies if risk abatement in the banking industry is to be achieved.

Laws, regulations and rules, Services, Risk management, Bank deposits

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The gains from takeover deregulation: evidence from the end of interstate banking restrictions

Article Abstract:

This paper uses interstate banking deregulation to explore the benefits of takeover deregulation and how these benefits are distributed across different firms. We find large and significant abnormal returns around the Interstate Banking and Branching Efficiency Act of 1994 which imply it created $85 billion of value in the banking industry. Consistent with an active market for corporate control allowing beneficial consolidation and providing needed discipline, there is a strong negative relationship between banks' abnormal returns and their prior performance. Consistent with managerial entrenchment limiting takeover discipline, banks with higher insider ownership, lower outside block ownership, and/or less independent boards have lower abnormal returns. (Reprinted by permission of the publisher.)

Commercial Banks, Commercial Banking, Research, Acquisitions and mergers, Bank stocks, Interstate banking

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Depositors' welfare, deposit insurance, and deregulation

Article Abstract:

A model for determining optimal bank deposit insurance regulations is developed and used to assess the impact of deregulation in this area. The actual relationship of risk and return on investments affects the optimality of deposit insurance regulations. Regulations promulgated by the Federal Deposit Insurance Corporation are analyzed, using the model, and four propositions related to such regulations are suggested by the research. The discussion of this research paper centers around the model constructed and its application to the propositions developed. The model's construction appears to offer extreme preferences, to view bank deposits as risk-free assets, and to assume that risk-free fund depositors are turned away by banking institutions.

United States, United States. Federal Deposit Insurance Corp.

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