Not all bank systemic risks are alike: Deposit insurance and bank risk revisited

Wang Chen, Zhiwen Zhang, Shigeyuki Hamori and Takuji Kinkyo

International Review of Financial Analysis, 2021, vol. 77, issue C

Abstract: This study investigates how deposit insurance, especially in terms of its design features, affects the sources of banking systemic risk. We do so by decomposing a bank's contribution to systemic risk into idiosyncratic tail risk (Alpha), the exposure to fundamental macroeconomic and finance factors (Beta) and bank interconnectedness (Gamma). Our results indicate that while deposit insurance may increase Alpha, there is a U-shaped relationship between deposit insurance coverage and Beta and Gamma, indicating the existence of an optimal coverage level that minimizes systemic risk. We also find that insurance design characteristics significantly affect the U-shaped relationship. Deposit insurance designed to be independently organized, with public administration, additional supervision and risk minimization functions, and private funding, further reduces the systemic risk associated with any given level of coverage. With several robustness checks, including potential endogeneity, heterogeneity, and possible limits in the sample, the results remain valid. Our results should benefit policymakers who design and optimize deposit insurance schemes to ensure that they play a positive role.

Keywords: Deposit insurance; Financial stability; Systemic risk (search for similar items in EconPapers)
JEL-codes: G10 G21 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:77:y:2021:i:c:s105752192100185x

DOI: 10.1016/j.irfa.2021.101855

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