Article Abstract:
The paper models the domino effect and defines a measurement for the necessity of banking supervision. The effect of several factors, such as the desired stability of the banking system, its size, the amount of negative externalities that are considered by banks, and supervisory costs, on the necessity of supervision are studied. For instance, it was found that, under certain circumstances, supervision becomes less essential if the number of banks increases. The paper has also emphasized that objective difficulties in the supervision of banks, by simply imposing restrictions on their activities, are intrinsic to the operation of the banks themselves. The paper provides some insight into the current debate as to the necessity or redundancy of supervision and regulation. (Reprinted by permission of the publisher.)
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Article Abstract:
Optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits, and interest rate on deposits, the economy's risk-free interest rate, and the regulators' bank audit/administration costs. Under competitive conditions, the threshold assets-to-deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one. Optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank's risk on investment and nonincreasing in the bank's current assets-to-deposits ratio. (Reprinted by permission of the publisher.)
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Article Abstract:
Most conventional home mortgage contracts include a due-on-sale clause that is equivalent to a prepayment penalty equal to the difference between the face value and market value of the loan. A bilateral game with asymmetric information is analyzed, with it shown that banks demand the full penalty unless the loan's market value is sufficiently low, in which case the banks will demand a prepayment penalty that is independent of the loan's market value so as to induce additional prepayments. It is also demonstrated through a risk-sharing argument that the due-on-sale clause is best in certain settings even though some beneficial home sales will be eliminated.
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