Deposit Insurance System or the Central Bank’s Bailout？——A Dynamic-Game Perspective
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| Title | Deposit Insurance System or the Central Bank’s Bailout？——A Dynamic-Game Perspective
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| Author | Yao Dongmin,Yan Jianye and Yin Yesheng |
| Organization | Renmin University of China; University of International Business and Economics;Bank of China |
| Email | yaodongminn@163.com；yanjianye@gmail.com；690036913qq@163.com。 |
| Key Words | systemic risk; deposit insurance system; internal governance |
| Abstract | Being regarded as a market intervention, the bail-out behavior of the central bank after crisis has been criticized for years. It leads to drastic moral hazard situations and is pointed to be the main reason for the internal governance inefficiency in China's commercial banks. However, under strict regulation, previous financial crisis and post-crisis reactions did not draw enough attention and emphasis in China until the financial crisis in 2008. When the banking system encountered a serious systemic crisis, the Deposit Insurance System (DIS) has received significant attention as an important solution. By employing the principal-agent model, this paper provides a comparison, in the perspective of commercial banks’ internal governance, between an implicit fully secured arrangement and an explicit deposit insurance system. We point out that the DIS has two major advantages over the direct Bail-out system: first, the DIS can reduce the regulatory uncertainty faced by the central bank, and provide a way to evaluate the regulation consequence; second, the DIS can internalize the cost of risk exposure, which reduces the possibility of moral hazard. |
| Serial Number | WP527 |
| Time | 2013-10-15 |
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