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Corporate control, portfolio choice, and the decline of banking

Article Abstract:

In the 1980s, U.S. banks became systematically less profitable and riskier as nonbank competition eroded the profitability of banks' traditional activities. Bank failures rose exponentially during this decade. The leading explanation for the persistence of these trends centers on fixed-rate deposit insurance: the insurance gives bank equityholders an incentive to take on risk when the value of bank charters falls. We propose and test an alternative explanation based on corporate control considerations. We show that managerial entrenchment played a more important role than did the moral hazard associated with deposit insurance in explaining the recent behavior of the banking industry. (Reprinted by permission of the publisher.)

Portfolio management, Bank failures

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Fairly priced deposit insurance and bank charter policy

Article Abstract:

The thrust of current deposit insurance reform - risk-based insurance premiums and capital requirements - is an effort to price deposit insurance more fairly. Fairly pricing deposit insurance eliminates inequitable wealth transfers, but it does not lead to an efficient equilibrium. This paper shows that an alternative charter policy results in an efficient separating equilibrium. (Reprinted by permission of the publisher.)

Prices and rates, Equilibrium (Economics), Financial institution charters

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Do depositors punish banks for bad behavior? Market discipline, deposit insurance, and banking crises

Article Abstract:

Review of reaction to banking crises suggests depositors often discipline banks by requiring higher interest rates and withdrawing deposits. Deposit insurance appears to have little effect on market discipline and aggregate shocks significantly affect interest rates and deposits during crises.

United States, Latin America, Statistical Data Included, Management

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