Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-18T05:39:58.115Z Has data issue: false hasContentIssue false
  • English
  • Français

Insurance Pricing, Distortions, and Moral Hazard: Quasi-Experimental Evidence from Deposit Insurance

Published online by Cambridge University Press:  19 January 2023

George F. Shoukry Open the ORCID record for George F. Shoukry [Opens in a new window]
George F. Shoukry*
Affiliation:
Federal Deposit Insurance Corporation Center for Financial Research
*
gshoukry@fdic.gov
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Pricing is integral to insurance design, directly influencing firm behavior and moral hazard, though its effects are insufficiently understood. I study a quasi-experiment in which deposit insurance premiums were changed for U.S. banks with unequal timing, generating differentials between banks in both levels and risk-based “steepness” of premiums. I find evidence that differentials in premiums resulted in distortions, including regulatory arbitrage, but also provided strong incentives to curb moral hazard. I find that firms that faced stronger pricing incentives to become (or remain) safer were more likely to subsequently do so than similar firms that faced weaker pricing incentives.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 896 - 932
Creative Commons
This is a work of the US Government and is not subject to copyright protection within the United States. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Copyright
© Federal Deposit Insurance Corporation, 2023

Footnotes

I thank an anonymous referee, Rosalind Bennett, David Coxon (discussant), Mara Faccio (the editor), Vivian Hwa, Małgorzata Iwanicz-Drozdowska (discussant), Kathryn Judge (discussant), Roni Kisin, Troy Kravitz, Mark Kutzbach, Carolina Lopez-Quiles Centeno (discussant), Lynn Shibut, Anjan Thakor (discussant); and participants at the FDIC Center for Financial Research seminar series, the 2020 Community Banking in the 21st Century Research and Policy Conference, the 2021 Biennial International Association of Deposit Insurers (IADI) Research Conference, the 2021 Financial Management Association (FMA) Annual Meeting, and the 2021 Annual FDIC Bank Research Conference. All errors are my own. Views and opinions expressed in this article reflect those of the author and do not necessarily reflect those of the FDIC or the United States.

References

Abadie, A.; Diamond, A.; and Hainmueller, J.. “Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California’s Tobacco Control Program.” Journal of the American statistical Association, 105 (2010), 493–505.CrossRefGoogle Scholar
Abadie, A., and Gardeazabal, J.. “The Economic Costs of Conflict: A Case Study of the Basque Country.” American Economic Review, 93 (2003), 113–132.CrossRefGoogle Scholar
Acharya, V. V.; Santos, J.; and Yorulmazer, T.. “Systemic Risk and Deposit Insurance Premiums.” Federal Reserve Bank of New York Economic Policy Review, 16 (2010), 89–99.Google Scholar
Aggarwal, R., and Jacques, K. T.. “The Impact of FDICIA and Prompt Corrective Action on Bank Capital and Risk: Estimates Using a Simultaneous Equations Model.” Journal of Banking and Finance, 25 (2001), 1139–1160.CrossRefGoogle Scholar
Allen, F.; Carletti, E.; and Marquez, R.. “Deposits and Bank Capital Structure.” Journal of Financial Economics, 118 (2015), 601–619.CrossRefGoogle Scholar
Anginer, D.; Demirguc-Kunt, A.; and Zhu, M.. “How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis.” Journal of Banking and Finance, 48 (2014), 312–321.CrossRefGoogle Scholar
Athey, S.; Bayati, M.; Doudchenko, N.; Imbens, G.; and Khosravi, K., “Matrix Completion Methods for Causal Panel Data Models.” NBER Working Paper No. 25132 (2018).CrossRefGoogle Scholar
Bai, J. “Panel Data Models With Interactive Fixed Effects.” Econometrica, 77 (2009), 1229–1279.Google Scholar
Banegas, A., and Tase, M.. “Reserve Balances, the Federal Funds Market and Arbitrage in the New Regulatory Framework.” Journal of Banking and Finance, 118 (2020), 105,893.CrossRefGoogle Scholar
Basten, C., and Mariathasan, M.. “How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3164780 (2018).CrossRefGoogle Scholar
Bloecher, E. P.; Seale, G. A.; and Vilim, R. D.. “Options for Pricing Federal Deposit Insurance.” FDIC Banking Review, 15 (2003), 1.Google Scholar
Board of Governors of the Federal Reserve System. “Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services, U.S. House of Representatives, August 2, 1995.” Federal Reserve Bulletin, 81 (1995), 935–938.Google Scholar
Boyd, J. H.; Chang, C.; and Smith, B. D.. “Deposit Insurance: a Reconsideration.” Journal of Monetary Economics, 49 (2002), 1235–1260.CrossRefGoogle Scholar
Brot-Goldberg, Z. C.; Chandra, A.; Handel, B. R.; and Kolstad, J. T.. “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics.” Quarterly Journal of Economics, 132 (2017), 1261–1318.CrossRefGoogle Scholar
Chan, Y.-S.; Greenbaum, S. I.; and Thakor, A. V.. “Is Fairly Priced Deposit Insurance Possible?” Journal of Finance, 47 (1992), 227–245.CrossRefGoogle Scholar
Cohen, A., and Dehejia, R.. “The Effect of Automobile Insurance and Accident Liability Laws on Traffic Fatalities.” Journal of Law and Economics, 47 (2004), 357–393.CrossRefGoogle Scholar
Cornett, M. M.; Mehran, H.; and Tehranian, H.. “The Impact of Risk-Based Premiums on FDIC-Insured Institutions.” Journal of Financial Services Research, 13 (1998), 153–169.CrossRefGoogle Scholar
Crump, R. K.; Hotz, V. J.; Imbens, G. W.; and Mitnik, O. A.. “Dealing with Limited Overlap in Estimation of Average Treatment Effects.” Biometrika, 96 (2009), 187–199.CrossRefGoogle Scholar
Dave, D., and Kaestner, R.. “Health Insurance and Ex Ante Moral Hazard: Evidence from Medicare.” International Journal of Health Care Finance and Economics, 9 (2009), 367.CrossRefGoogle ScholarPubMed
Demirgüç-Kunt, A., and Detragiache, E.. “Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation.” Journal of Monetary Economics, 49 (2002), 1373–1406.CrossRefGoogle Scholar
Demirgüç-Kunt, A., and Kane, E. J.. “Deposit Insurance Around the Globe: Where Does it Work?” Journal of Economic Perspectives, 16 (2002), 175–195.CrossRefGoogle Scholar
Doudchenko, N., and Imbens, G. W.. “Balancing, Regression, Difference-in-Differences and Synthetic Control Methods: A Synthesis.” NBER Working Paper No. 22791 (2016).CrossRefGoogle Scholar
Duquerroy, A.; Matray, A.; and Saidi, F.. “Sticky Deposit Rates and Allocative Effects of Monetary Policy.” Banque de France Working Paper No. 794 (2020).CrossRefGoogle Scholar
Ehrlich, I., and Becker, G. S.. “Market Insurance, Self-Insurance, and Self-Protection.” Journal of Political Economy, 80 (1972), 623–648.CrossRefGoogle Scholar
FDIC. “FDIC Annual Report 1993.” https://www.fdic.gov/about/strategic/report/ (1994).Google Scholar
FDIC. “FDIC Annual Report 1995.” https://www.fdic.gov/about/strategic/report/ (1996).Google Scholar
FDIC. “FDIC Annual Report 1996.” https://www.fdic.gov/about/strategic/report/ (1997).Google Scholar
FDIC. “A Brief History of Deposit Insurance in the United States.” https://www.fdic.gov/bank/historical/brief/brhist.pdf (1998).Google Scholar
FDIC. “FICO Assessment.” https://www.fdic.gov/deposit/insurance/risk/assesrte.html (2017).Google Scholar
FDIC. “FDIC Amended Restoration Plan.” Federal Register, 87 (2022), 39,518–39,520.Google Scholar
Flannery, M. J. “Pricing Deposit Insurance When the Insurer Measures Bank Risk with Error.” Journal of Banking and Finance, 15 (1991), 975–998.CrossRefGoogle Scholar
Gobillon, L., and Magnac, T.. “Regional Policy Evaluation: Interactive Fixed Effects and Synthetic Controls.” Review of Economics and Statistics, 98 (2016), 535–551.CrossRefGoogle Scholar
Gómez-Fernández-Aguado, P.; Partal-Ureña, A.; and Trujillo-Ponce, A.. “Moving Toward Risk-Based Deposit Insurance Premiums in the European Union: The Case of Spain.” Applied Economics, 46 (2014), 1547–1564.CrossRefGoogle Scholar
Grossman, R. S. “Deposit Insurance, Regulation, and Moral Hazard in the Thrift Industry: Evidence from the 1930’s.” American Economic Review, 82 (1992), 800–821.Google Scholar
Gueyie, J.-P., and Lai, V. S.. “Bank Moral Hazard and the Introduction of Official Deposit Insurance in Canada.” International Review of Economics and Finance, 12 (2003), 247–273.CrossRefGoogle Scholar
Hansell, S. “Company News; Greenpoint to Pay $660 Million for 60 Home Savings Branches.” New York Times, May, 16. https://www.nytimes.com/1995/05/16/business/company-news-greenpoint-to-pay-660-million-for-60-home-savings-branches.html, last accessed Mar 14, 2019 (1995).Google Scholar
Heider, F.; Saidi, F.; and Schepens, G.. “Life Below Zero: Bank Lending Under Negative Policy Rates.” Review of Financial Studies, 32 (2019), 3728–3761.CrossRefGoogle Scholar
Helfer, R. “Summary of Statement of Chairman Ricky Helfer on the Condition of the SAIF and Related Issues.” FDIC. https://www.fdic.gov/news/news/speeches/archives/1995/sp28july95.html (1995).Google Scholar
Hooks, L. M., and Robinson, K. J.. “Deposit Insurance and Moral Hazard: Evidence from Texas Banking in the 1920s.” Journal of Economic History, 62 (2002), 833–853.CrossRefGoogle Scholar
Hovakimian, A.; Kane, E. J.; and Laeven, L.. “How Country and Safety-Net Characteristics Affect Bank Risk-Shifting.” Journal of Financial Services Research, 23 (2003), 177–204.CrossRefGoogle Scholar
IADI. “Evaluation of Differential Premium Systems for Deposit Insurance.” https://www.iadi.org/en/research/research-papers/ (2020).Google Scholar
Ioannidou, V. P., and Penas, M. F.. “Deposit Insurance and Bank Risk-Taking: Evidence from Internal Loan Ratings.” Journal of Financial Intermediation, 19 (2010), 95–115.CrossRefGoogle Scholar
Kandrac, J., and Schlusche, B.. “Quantitative Easing and Bank Risk Taking: Evidence from Lending.” Journal of Money, Credit and Banking, 53 (2021), 635–676.CrossRefGoogle Scholar
Karels, G. V., and McClatchey, C. A.. “Deposit Insurance and Risk-Taking Behavior in the Credit Union Industry.” Journal of Banking and Finance, 23 (1999), 105–134.CrossRefGoogle Scholar
Keating, T., and Macchiavelli, M.. “Interest on Reserves and Arbitrage in Post-Crisis Money Markets.” FEDS Working Paper 2017–124 (2017).CrossRefGoogle Scholar
Kim, E., and Rezende, M.. “Deposit Insurance Premiums and Bank Risk-Taking.” Available at SSRN 3676610 (2020).CrossRefGoogle Scholar
Kreicher, L.; McCauley, R. N.; and McGuire, P.. “The 2011 FDIC Assessment on Banks Managed Liabilities: Interest Rate and Balance-Sheet Responses.” BIS Working Paper 413 (2013).CrossRefGoogle Scholar
Laeven, L. “Pricing of Deposit Insurance.” The World Bank (2002).CrossRefGoogle Scholar
Lateef, N. V., and Sczudio, R. S.. “Federal Deposit Insurance Funds: The Impending Rate Disparity between Banks and Thrifts.” Banking Law Journal, 112 (1995), 353–382.Google Scholar
Pennacchi, G. “Risk-Based Capital Standards, Deposit Insurance, and Procyclicality.” Journal of Financial Intermediation, 14 (2005), 432–465.CrossRefGoogle Scholar
Pennacchi, G. “Deposit Insurance, Bank Regulation, and Financial System Risks.” Journal of Monetary Economics, 53 (2006), 1–30.CrossRefGoogle Scholar
Prescott, E. S. “Can Risk-Based Deposit Insurance Premiums Control Moral Hazard?” Federal Reserve Bank of Richmond Economic Quarterly, 88 (2002), 87–100.Google Scholar
Segal, D. A. “A Note to Congress and the FDIC: After FIRREA, Where’s the BIF.” Fordham Law Review, 59 (1991), S411–S459.Google Scholar
Senerpont Domis, O. “Banks Charter for a Thrift Clears Way for Exit from Fund Series: 2.” American Banker, 161 (1996).Google Scholar
Spenkuch, J. L. “Moral Hazard and Selection Among the Poor: Evidence from a Randomized Experiment.” Journal of Health Economics, 31 (2012), 72–85.CrossRefGoogle ScholarPubMed
van Kleef, R. C.; van de Ven, W. P.; and van Vliet, R. C.. “Shifted Deductibles for High Risks: More Effective in Reducing Moral Hazard than Traditional Deductibles.” Journal of Health Economics, 28 (2009), 198–209.CrossRefGoogle ScholarPubMed
Wheelock, D. C., and Wilson, P. W.. “Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency.” Review of Economics and Statistics, 77 (1995), 689–700.CrossRefGoogle Scholar
Xu, Y. “Generalized Synthetic Control Method: Causal Inference with Interactive Fixed Effects Models.” Political Analysis, 25 (2017), 57–76.CrossRefGoogle Scholar
Supplementary material: File

Shoukry supplementary material

Shoukry supplementary material
Download Shoukry supplementary material(File)
File 253.6 KB