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Do higher solvency ratios reduce the costs of bailing out insured banks?
Author(s) -
Eastwood Robert K.
Publication year - 2004
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.220
Subject(s) - solvency , moral hazard , economics , bailout , monetary economics , capital (architecture) , capital requirement , solvency ratio , hazard ratio , deposit insurance , credit risk , actuarial science , financial system , financial crisis , microeconomics , macroeconomics , mathematics , incentive , market liquidity , confidence interval , history , archaeology , statistics
The relationship between solvency constraints and bank behaviour in the presence of fixed rate deposit insurance is investigated. A rise in the minimum solvency ratio does not necessarily reduce the adverse consequences of moral hazard: bank efficiency may fall and expected bailout costs may rise. Such outcomes are possible even if credit risk is purely systemic. Similar results obtain in respect of level increases in bank capital, tangible or intangible, although in this case purely systemic risk excludes perverse outcomes. Copyright © 2003 John Wiley & Sons, Ltd.