OHCh11 - Chapter 11: Economic Analysis of Banking...

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Chapter 11: Economic Analysis of Banking Regulation
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1 Asymmetric Information and Banking Regula- tion 1.1 Government Safety Net: Deposit Insurance and the FDIC The FDIC started operations in 1934 to provide deposit insurance. Before this, bank panics had been common in the United States. The FDIC provides a government safety net for depositors. The FDIC uses two primary methods to handle a failed bank.
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up to the $100,000 insurance limit. Purchase and assumption method: the FDIC reorganizes the bank, guaranteed all deposits. 1.2 Moral Hazard and the Government Safety Net Depositors do not monitor their bank, and the bank has incentives to taking on too much risk. Banks have been given the following bet: "Heads I win, tails the taxpayer loses."
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1.3 "Too Big to Fail" Because the failure of a very large bank makes it more likely that a major bank to fail. Continental Illinois, one of the ten largest banks in the United States be-
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This note was uploaded on 07/17/2008 for the course ECON 520 taught by Professor Ogaki during the Spring '07 term at Ohio State.

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OHCh11 - Chapter 11: Economic Analysis of Banking...

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