"This paper studies bank regulation in the presence of deposit insurance, where banks have private information on their own ability and their investment strategy. Banks choose the mean and variance of their portfolio return. Regulators wish to control banks' risk choice, even though all agents...

This paper studies bank regulation in the presence of deposit insurance, where banks have private information on their own ability and their investment strategy. Banks choose the mean and variance of their portfolio return. Regulators wish to control banks' risk choice, even though all agents...

It is commonly thought that risk-based deposit insurance premiums can control the moral hazard inherent in deposit insurance. That view is wrong; other devices — such as state-contingent payments and supervisory exams — are needed as well