Compensating victims of bankrupted financial institutions: a law and economic analysis

Robert J. Dijkstra (Tilburg Institute for Interdisciplinary Studies of Civil Law and Conflict Resolution Systems (TISCO), Tilburg University, Tilburg, The Netherlands)
Michael G. Faure (Maastricht Institute for Transnational Legal Research (METRO), Maastricht University, Maastricht, The Netherlands)

Journal of Financial Regulation and Compliance

ISSN: 1358-1988

Publication date: 10 May 2011

Abstract

Purpose

The purpose of this paper is to understand the incentive effects of existing compensation mechanisms in case of the bankruptcy of a financial institution.

Design/methodology/approach

The paper uses insights of law and economics to predict the effects of compensation mechanisms on the incentives of depositors, financial institutions, financial regulators and government.

Findings

The paper shows that the current compensation system in The Netherlands will not provide sufficient incentives for all stakeholders to prevent the failure of a financial institution. Adjustments to this system are necessary to improve these incentives.

Original/value

The paper examines for the first time the impact of different compensation mechanisms on the incentives of multiple stakeholders. It also shows how these mechanisms influence each other regarding their incentive generating capability. These findings offer important insights for policy makers.

Keywords

Citation

Dijkstra, R. and Faure, M. (2011), "Compensating victims of bankrupted financial institutions: a law and economic analysis", Journal of Financial Regulation and Compliance, Vol. 19 No. 2, pp. 156-173. https://doi.org/10.1108/13581981111123861

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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