ABSTRACT
Table 2 shows the value of h that can restore the funding structure to ds = 0.495. One can observe from the table that, h has to increase a lot in order to restore the socially optimal funding structure. It implies that, according to this model, penalty can be dominated by the excessive risk-taking incentive in a multi-bank economy. From Table 2, one can see that it is hardly possible for the regulator to restore optimal funding structure even in a four-bank economy, because the regulator will almost need to triple h to achieve the goal (increase h from 0.25 to 0.65). Therefore, this result suggests that it may be inefficient to use penalty to restore socially optimal funding structure.
