Elsevier

Journal of Banking & Finance

Volume 8, Issue 4, December 1984, Pages 557-565
Journal of Banking & Finance

Deregulation and bank financial policy

https://doi.org/10.1016/S0378-4266(84)80046-1Get rights and content

The standard view that banks can value maximize by exploiting non-risk-rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency. Recognition of this effect changes the bank's optimal financial policy and can induce extreme risk-averting as well as risk-taking behavior. However, as the value of the bank charter falls, the risk-taking strategy is more apt to dominate. Therefore, current deregulation of the banking industry, by easing entry and devaluing charters, holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted.

References (6)

There are more references available in the full text version of this article.

Cited by (407)

  • Internal versus external capital markets and risk-taking

    2024, International Review of Economics and Finance
  • Bank market power and supervisory enforcement actions

    2024, International Review of Financial Analysis
  • Foreseen risks

    2023, Journal of Economic Theory
View all citing articles on Scopus
*

I am grateful to Alex Kane, Bob McDonald and an anonymous referee for helpful suggestions and comments.

View full text