Working Paper: CEPR ID: DP4727
Authors: Rafael Repullo
Abstract: This Paper analyses the effects on ex ante risk-shifting incentives and ex post fiscal costs of three policies that are frequently used in dealing with banking crises, namely, forbearance from prudential regulations, extension of blanket deposit guarantees, and provision of unrestricted liquidity support. In the context of a simple model of information-based bank runs, where banks are funded with both insured and uninsured deposits, the paper shows that the expectation of implementation of any of these policies leads to a reduction in the interest rate of uninsured deposits and in the bank?s incentives to take risk, but increases the expected fiscal costs of the crises.
Keywords: bank runs; bank supervision; banking crises; deposit insurance; forbearance; lender of last resort; risk-shifting incentives
JEL Codes: E58; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expectation of policies (D78) | Reduction in interest rate on uninsured deposits (E43) |
| Expectation of policies (D78) | Changes in banks' risk incentives (G21) |
| Higher proportions of insured deposits (G28) | Lower interest rates required by uninsured depositors (G21) |
| Higher proportions of insured deposits (G28) | Decreased banks' incentives to take risks (G21) |
| Expectation of policies (D78) | Higher expected fiscal costs (H69) |
| Quality of information available to uninsured depositors (G28) | Affects expectations and resulting fiscal costs (H31) |