RISK-SHIFTING BEHAVIOR AT COMMERCIAL BANKS WITH DIFFERENT DEPOSIT INSURANCE ASSESSMENTS: FURTHER EVIDENCE FROM U.S. MARKETS

In this article, we investigate both the risk-shifting behavior of banks and the extent to which risk was controlled after the Federal Deposit Insurance Corporation adopted a risk-based assessment system in U.S. markets. The risk-shifting behavior of commercial banks was significantly mitigated by the adoption of a risk-based deposit insurance assessment system. The risk-shifting incentive remains, especially for less capitalized or higher premium banks, which suggests that during 1992–2008, risk-based assessments reduced but did not eliminate the moral hazard problem in banks. Moreover, the results reveal that larger banks did not risk shift more than did smaller banks following the 1991 deposit insurance reform.