On bank’s risk incentives under deposit insurance system

Abstract

This paper refers to bank’s risk incentive problem which is one of the factors behind its risky behavior toward investing in projects. Using the relevant distributions of depositors’ bank balances, we study the risk incentive influence. As a result, the bank’s risk incentive is shown to be classified regarding depositors and bank’s shareholders who increase its capital, indicating the former being positive value and the latter negative. In this study, we use perpetual American put option and perpetual down and out call option. Thus, we examine changes in the influence of these incentives, showing several numerical examples.