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Do higher solvency ratios reduce the costs of bailing out insured banks?

journal contribution
posted on 2023-06-07, 14:02 authored by Robert Eastwood
The relationship between solvency constraints and bank behaviour in the presence of fixed rate deposit insurance is investigated. A rise in the minimum solvency ratio does not necessarily reduce the adverse consequences of moral hazard: bank efficiency may fall and expected bailout costs may rise. Such outcomes are possible even if credit risk is purely systemic. Similar results obtain in respect of level increases in bank capital, tangible or intangible, although in this case purely systemic risk excludes perverse outcomes.

History

Publication status

  • Published

Journal

International Journal of Finance and Economics

ISSN

1099-1158

Issue

1

Volume

9

Page range

39-48

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2008-02-11

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