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| Author: | Nagarajan, S. Sealey, C. |
| Title: | Forbearance, deposit insurance pricing, and incentive compatible bank regulation |
| Journal: | Journal of Banking and Finance
1995 : SEP, VOL. 19:6, p. 1109-1130 |
| Index terms: | DEPOSIT BANKS INSURANCE MORAL HAZARD |
| Language: | eng |
| Abstract: | This paper examines the incentive compatible role of regulatory forbearance policy in the context of optimal bank regulation under moral hazard. The authors show that when a bank's asset portfolio returns have market risk, the regulator can influence the bank's choice of ex ante risk by delaying the closure of an insolvent bank. The optimal closure policy involves coordinating the closure decision with market-wide performance. |
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