Capital Adequacy, Deposit Insurance, and the Effect of Their Interaction on Bank Risk

Seksak Jumreornvong, Chanakarn Chakreyavanich, Sirimon Treepongkaruna and Pornsit Jiraporn
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Seksak Jumreornvong: Department of Finance, Thammasat Business School, Thammasat University, Bangkok 10200, Thailand
Chanakarn Chakreyavanich: Kasikorn Bank, Bangkok 10200, Thailand
Sirimon Treepongkaruna: Accounting and Finance, Business School, University of Western Australia, Perth, WA 6009, Australia

JRFM, 2018, vol. 11, issue 4, 1-18

Abstract: This paper investigates how deposit insurance and capital adequacy affect bank risk for five developed and nine emerging markets over the period of 1992–2015. Although full coverage of deposit insurance induces moral hazard by banks, deposit insurance is still an effective tool, especially during the time of crisis. On the contrary, capital adequacy by itself does not effectively perform the monitoring role and leads to the asset substitution problem. Implementing the safety nets of both deposit insurance and capital adequacy together could be a sustainable financial architecture. Immediate-effect analysis reveals that the interplay between deposit insurance and capital adequacy is indispensable for banking system stability.

Keywords: deposit insurance; capital adequacy; bank risk (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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