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Deposit Rate Ceilings as a Tool of Prudential Regulation

Author(s): Janusz Krajewski

Journal: Contemporary Economics
ISSN 1897-9254

Volume: 1;
Issue: 4;
Start page: 1;
Date: 2007;
Original page

The purpose of the paper is to present one of prudential regulation instruments in an environment that favors to engage in moral hazard behavior. The last decades proved that there is a link between financial liberalization and banking crises. In order to avoid crises and prevent banks engaging in gambling behavior, the system of prudential regulations has been implemented. The emphasis has been placed on the use of capital requirements, typically using the BIS standard developed in the Basel Accord.As the excessive reliance on capital requirements can become costly for the banks and lead to loose their franchise value and undermine incentives for prudent investing. The instrument that can create the franchise value, i.e. earning profits in the current period and in the future, is a policy of deposit rate controls. In the paper was also revealed why the policy of setting interest rate ceiling on deposits had not achieved its intended objectives, especially in the view of the fail of the Regulation Q policy.

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