Deregulation and bank financial policy

The standard view that banks can value maximize by exploiting non-risk-rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency. Recognition of this effect changes the bank's optimal financial policy and can induce extreme risk-averting as well as risk-taking behavior. However, as the value of the bank charter falls, the risk-taking strategy is more apt to dominate. Therefore, current deregulation of the banking industry, by easing entry and devaluing charters, holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted.