Optimal Capitalization and Deposit Insurance Strategies with Regard to Moral Hazard

Hong MAO*, Jiang CHENG

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)

Abstract

In this article, we develop a theoretical model investigating how to optimize capitalization and deposit insurance strategies in a cyclically economic environment and by considering the moral hazard inherent in bank deposit insurance. The objective of banks is assumed to minimize the sum of capital cost, expected loss of banks’ bankruptcy and the opportunity loss of partial deposit insurance. We also assume that insured banks can purchase partial deposit insurance. Our numerical analysis results using the historical data of four major banks in the U. S. indicate that deposit insurance and capitalization can be mutually complementary to each other under certain conditions.
Original languageEnglish
Article number105885
JournalJournal of Economics and Business
Early online date25 Nov 2019
DOIs
Publication statusE-pub ahead of print - 25 Nov 2019

Fingerprint

Capitalization
Moral hazard
Deposit insurance
Purchase
Bankruptcy
Expected loss
Cost of capital
Economic environment
Bank deposits
Numerical analysis

Keywords

  • Deposit insurance
  • Capitalization
  • Optimization
  • Moral hazard
  • Complementary

Cite this

@article{4fb88149d4d04709852fb3e8f93aaf96,
title = "Optimal Capitalization and Deposit Insurance Strategies with Regard to Moral Hazard",
abstract = "In this article, we develop a theoretical model investigating how to optimize capitalization and deposit insurance strategies in a cyclically economic environment and by considering the moral hazard inherent in bank deposit insurance. The objective of banks is assumed to minimize the sum of capital cost, expected loss of banks’ bankruptcy and the opportunity loss of partial deposit insurance. We also assume that insured banks can purchase partial deposit insurance. Our numerical analysis results using the historical data of four major banks in the U. S. indicate that deposit insurance and capitalization can be mutually complementary to each other under certain conditions.",
keywords = "Deposit insurance, Capitalization, Optimization, Moral hazard, Complementary",
author = "Hong MAO and Jiang CHENG",
year = "2019",
month = "11",
day = "25",
doi = "10.1016/j.jeconbus.2019.105885",
language = "English",
journal = "Journal of Economics and Business",
issn = "0148-6195",
publisher = "Elsevier Inc.",

}

Optimal Capitalization and Deposit Insurance Strategies with Regard to Moral Hazard. / MAO, Hong; CHENG, Jiang.

In: Journal of Economics and Business, 25.11.2019.

Research output: Journal PublicationsJournal Article (refereed)

TY - JOUR

T1 - Optimal Capitalization and Deposit Insurance Strategies with Regard to Moral Hazard

AU - MAO, Hong

AU - CHENG, Jiang

PY - 2019/11/25

Y1 - 2019/11/25

N2 - In this article, we develop a theoretical model investigating how to optimize capitalization and deposit insurance strategies in a cyclically economic environment and by considering the moral hazard inherent in bank deposit insurance. The objective of banks is assumed to minimize the sum of capital cost, expected loss of banks’ bankruptcy and the opportunity loss of partial deposit insurance. We also assume that insured banks can purchase partial deposit insurance. Our numerical analysis results using the historical data of four major banks in the U. S. indicate that deposit insurance and capitalization can be mutually complementary to each other under certain conditions.

AB - In this article, we develop a theoretical model investigating how to optimize capitalization and deposit insurance strategies in a cyclically economic environment and by considering the moral hazard inherent in bank deposit insurance. The objective of banks is assumed to minimize the sum of capital cost, expected loss of banks’ bankruptcy and the opportunity loss of partial deposit insurance. We also assume that insured banks can purchase partial deposit insurance. Our numerical analysis results using the historical data of four major banks in the U. S. indicate that deposit insurance and capitalization can be mutually complementary to each other under certain conditions.

KW - Deposit insurance

KW - Capitalization

KW - Optimization

KW - Moral hazard

KW - Complementary

U2 - 10.1016/j.jeconbus.2019.105885

DO - 10.1016/j.jeconbus.2019.105885

M3 - Journal Article (refereed)

JO - Journal of Economics and Business

JF - Journal of Economics and Business

SN - 0148-6195

M1 - 105885

ER -