How does deposit insurance affect bank risk? Evidence from the recent crisis

Deniz Anginer, Asli Demirguc-Kunt and Min Zhu

Journal of Banking & Finance, 2014, vol. 48, issue C, 312-321

Abstract: Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks which lead to excessive risk-taking. We examine the relation between deposit insurance and bank risk and systemic fragility in the years leading up to and during the recent financial crisis. We find that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. Our findings suggest that the “moral hazard effect” of deposit insurance dominates in good times while the “stabilization effect” of deposit insurance dominates in turbulent times. The overall effect of deposit insurance over the full sample we study remains negative since the destabilizing effect during normal times is greater in magnitude compared to the stabilizing effect during global turbulence. In addition, we find that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.

Keywords: Bank risk; Systemic risk; Deposit insurance; Bank supervision and regulation; Financial crisis (search for similar items in EconPapers)
JEL-codes: G21 G24 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (162)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426613003816
Full text for ScienceDirect subscribers only

Related works:
Working Paper: How does deposit insurance affect bank risk ? evidence from the recent crisis (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:48:y:2014:i:c:p:312-321

DOI: 10.1016/j.jbankfin.2013.09.013

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().