How can the information asymmetry between the banks and the regulators which cause the deposit insurance problems be reduced?

Question

Quizplus · Accepted Answer

Designing a self-selection mechanism that allows banks to choose their most desired combinations of insurance premium and capital requirement can help reduce the information asymmetry between the banks and regulators. This allows the banks to reveal more information about their risk profiles and allows the regulators to better tailor their supervisory approach. The other choices, such as reducing reserve requirements or lowering capital standards, could potentially increase the risk of bank failures and exacerbate the deposit insurance problem. The use of regulatory accounting principles may also not be effective in reducing information asymmetry, as banks could still withhold information or engage in manipulative accounting practices.

How Can the Information Asymmetry Between the Banks and the Regulators