Incentive problems in bank insider borrowing

Although bank insider abuses have been one of the most frequently cited causes of recent bank problems, the existing literature is surprisingly sparse in this area. The purpose of this article is to examine one element of insider abuse—the case of bank insider borrowing. In the context of the theory of financial intermediation, we propose a hypothesis that excessive insider borrowing creates substantial incentive problems and leads the bank to inferior performance. Our empirical analysis provides results consistent with this hypothesis. The policy implication of this article is that the regulatory agencies and especially the FDIC should carefully monitor banks with excessive insider borrowing to prevent an arbitrage against the insurance fund.