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The economics of banking crisis, regulation and deposit insurance.

Silva, Nancy Andrea (2008) The economics of banking crisis, regulation and deposit insurance. PhD thesis, London School of Economics and Political Science (United Kingdom).

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Abstract

This thesis provides an economic analysis of banking crisis, regulation and deposit insurance. Chapter 1 offers a critical review of the literature, identifying the main determinants of banking crises and their channels of contagion. Chapter 2 studies the effectiveness of deposit insurance in containing panic runs when depositors have private information. The region of panic runs decreases with the size of the guarantee and the degree of supervisory involvement of the agency in charge of insurance. High levels of insurance tend to increase the equilibrium demand deposit contract and so the probability of runs, but supervision can also limit this effect. Therefore, a scheme with limited insurance and a high degree of supervisory involvement should be preferred. Chapter 3 evaluates subordinated debt and disclosure requirements as instruments of market discipline. In the presence of deposit insurance, the former can be used to complement the latter, providing a new set of information which is useful to the regulator. If the subordinated bond has a long maturity, the probability of insolvency decreases for any level of noise in the information disclosed by the manager. If the bond can be rolled over, the quality of information improves substantially but the probability of insolvency increases slightly. Chapter 4 studies the inter-temporal effects of capital adequacy requirements. A bank's risk-taking dynamic depends on critical thresholds of the capital requirements in each period. When the requirement binds in the initial period, risk can be reduced to the social optimum but at the cost of reducing financial intermediation as well. Moral hazard increases because, among the binding banks, the better capitalised ones raise relatively more insured deposits and take on relatively more risk. When the requirement binds in the interim period risk-taking increases, the more so the less capitalised is the bank, making smaller banks weaker.

Item Type: Thesis (PhD)
Uncontrolled Keywords: Economics, Finance, Business Administration, Banking
Sets: Collections > ProQuest Etheses
Departments > Economics
URI: http://etheses.lse.ac.uk/id/eprint/2980

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