Open Access Journal Article

Critical condition for deposit insurance to partially or fully substitute for raising capital under cyclical economic environment

by Hong Mao a ,  Krzysztof Ostaszewski b,* orcid  and  Jin Wang c
a
Shanghai Second Polytechnic University, Shanghai, China
b
Department of Mathematics, Illinois State University, Illinois, USA
c
Office of Information Security, Beijing, China
*
Author to whom correspondence should be addressed.
JEA  2023 2(4):44; https://doi.org/10.58567/jea02040008
Received: 29 May 2023 / Accepted: 28 June 2023 / Published Online: 10 July 2023
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Abstract

Regulation of financial institutions has two key purposes: Solvency (prudential regulation) and consumer protection. Prudential regulation is implemented mainly by capital requirements, but governments also provide insurance for customer deposits, as a backup tool. In this article, we discuss the critical conditions for deposit insurance and capitalization to act as substitutes for each other, under cyclical economic environment. We make two assumptions. The first one is that deposit insurance is fairly priced and there is no moral hazard. The second one is that insurance creates incentives for moral hazard among insured banks, resulting in increased risk taking. We also discuss the critical conditions for deposit insurance and capitalization to be complementary under different proportions of deposit insurance.

Keywords: Deposit insurance; capitalization; critical conditions; sensitivity analysis;
Copyright: © 2023 by Mao, Ostaszewski and Wang. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
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ACS Style
Mao, H.; Ostaszewski, K.; Wang, J. Critical condition for deposit insurance to partially or fully substitute for raising capital under cyclical economic environment. Journal of Economic Analysis, 2023, 2, 44. https://doi.org/10.58567/jea02040008
AMA Style
Mao H, Ostaszewski K, Wang J. Critical condition for deposit insurance to partially or fully substitute for raising capital under cyclical economic environment. Journal of Economic Analysis; 2023, 2(4):44. https://doi.org/10.58567/jea02040008
Chicago/Turabian Style
Mao, Hong; Ostaszewski, Krzysztof; Wang, Jin 2023. "Critical condition for deposit insurance to partially or fully substitute for raising capital under cyclical economic environment" Journal of Economic Analysis 2, no.4:44. https://doi.org/10.58567/jea02040008
APA style
Mao, H., Ostaszewski, K., & Wang, J. (2023). Critical condition for deposit insurance to partially or fully substitute for raising capital under cyclical economic environment. Journal of Economic Analysis, 2(4), 44. https://doi.org/10.58567/jea02040008

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