Working Paper: NBER ID: w5711
Authors: Armen Hovakimian; Edward J. Kane
Abstract: Mispriced and misadministered deposit insurance imparts risk-shifting incentives to U.S. banks. Regulators are expected to monitor and discipline increases in bank risk exposure that would transfer wealth from the FDIC to bank stockholders. This paper assesses the success regulators had in controlling risk-shifting by U.S. banks during 1985-1994. In contrast to single-equation estimates developed from the option model by others, our simultaneous-equation evidence indicates that regulators failed to prevent large U.S. banks from shifting risk to the FDIC. Moreover, at the margin, banks that are undercapitalized shifted risk more effectively than other sample banks.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mispriced and misadministered deposit insurance (G28) | risk exposure (G22) |
| risk exposure (G22) | wealth transfer to stockholders (G35) |
| regulatory inefficacy (L51) | risk-shifting (H22) |
| level of capitalization (G31) | extent of risk-shifting (G32) |