A Literature Review on Risk-Based Premium: Interest Income Versus Moral Hazard

Geodita Woro Bramanti, Ninditya Nareswari (), Aang Kunaifi and Muhammad Saiful Hakim
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Geodita Woro Bramanti: Institut Teknologi Sepuluh Nopember, Department of Business Management
Ninditya Nareswari: Institut Teknologi Sepuluh Nopember, Department of Business Management
Aang Kunaifi: Universitas Airlangga, Department of Accounting
Muhammad Saiful Hakim: National Yunlin University of Science and Technology, Department of Finance

A chapter in Proceedings of the 3rd International Conference on Business and Engineering Management (IConBEM 2022), 2023, pp 295-304 from Springer

Abstract: Abstract The function of the deposit insurance is to guarantee depositors fund to stabilize the banking industry. However, the higher the percentage of the insurance can increase moral hazard which in the long run causes instability in the banking industry. The application of a risk-based premium and a limited guarantee are expected to reduce moral hazard from both the bank and the customer side. The purpose of this study was to examine the role of deposit insurance institutions in the banking industry, especially the application of risk-based premiums. More specifically, this study analyzes several previous research related to risk-based premiums, bank performance, and moral hazard practices. The results of this study were propositions that explain the effect of risk-based premiums with different time lags. This study also provides several propositions related to the crisis and the interest rate that can be tested empirically in future research. The implication of the study emphasizes that the application of risk-based premiums can stabilize the banking industry in case bank have comprehensive risk management, appropriate interest rate policies, and good economy condition.

Keywords: bank; banking industry stability; credit risk; interest income; moral hazard; risk-based premium (search for similar items in EconPapers)
Date: 2023
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DOI: 10.2991/978-94-6463-216-3_23

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