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Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition

John H. Kareken and Neil Wallace
The Journal of Business
Vol. 51, No. 3 (Jul., 1978), pp. 413-438
Stable URL: http://www.jstor.org/stable/2352275
Page Count: 26
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Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition
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Abstract

In this paper we examine the equilibrium of the banking industry under various regulatory schemes. There are several critical assumptions: There are complete contingent-claims markets; the banking industry is a monopoly supplier of deposit services, but is otherwise "small"; banks are limited-liability corporations and are subject to bankruptcy reorganization costs. Among the more important conclusions are the following: (1) Absent deposit insurance and regulation, bankruptcy does not occur; (2) under an FDIC-type insurance scheme, the banking industry holds as risky a portfolio as regulations allow; and (3) a capital requirement, by itself, does nothing to forestall bankruptcy.

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