Premium setting and bank behavior in a voluntary deposit insurance scheme |
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| Authors: | Ting-Fang Chiang E-Ching Wu Min-Teh Yu |
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| Institution: | (1) Department of International Business, Yuan Ze University, Jung-Li, 320, Taiwan;(2) Department of Finance, Providence University, Taichung, 43301, Taiwan;(3) Department of Finance, National Central University, Taoyuan, 320, Taiwan |
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| Abstract: | This study analyzes the effect of premium rates on banks’ incentives to join a deposit insurance scheme and their incentives
to invest in risky projects under a voluntary deposit insurance scheme. We find that in order to maximize social welfare,
the insurance agency must either set the premium rate to be low so as to attract all banks to join the insurance scheme, or
not to have the deposit insurance at all. However, the low premium rate in the voluntary scheme does not balance the budget
of the deposit insurance. We also show that in the compulsory deposit insurance scheme, however, it is possible to impose
an optimal premium rate that can balance the insurance agency’s budget and achieve the highest social welfare. The results
also present the dominance of the compulsory scheme over the voluntary scheme in terms of maximizing social welfare and balancing
the budget.
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| Keywords: | Deposit insurance Insurance premium Social welfare Compulsory Voluntary Moral hazard |
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