Deposit guarantee evaluation and incentives analysis in a mutual guarantee system |
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Authors: | Maria Elena De Giuli Mario Alessandro Maggi Francesco Maria Paris |
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Institution: | 1. Department of Economics and Quantitative Methods, University of Pavia, via S. Felice, 5, 27100 Pavia, Italy;2. Department of Quantitative Methods, University of Brescia, Italy |
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Abstract: | This paper analyzes how the deposit guarantee value affects the risk incentives in a mutual guarantee system. We liken the guarantee’s value to that of a European-style contingent claims portfolio. The main feature emerging from our model is that a mutual guarantee system would give banks an adverse incentive to increase riskiness. To mitigate this incentive, we introduce a regulatory provision modelled using a path-dependent contingent claim. By comparing the mutual guarantee system with a non-mutual one, we show that the former is less expensive, but implies higher adverse incentives for the banks, especially for undercapitalized institutions. |
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Keywords: | G13 G18 G21 |
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