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Banking Instability and Deposit Insurance: The Role of Moral Hazard

Harold Ngalawa (), Fulbert Tchana Tchana () and Nicola Viegi ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper aims at empirically investigating the role of moral hazard in the e¢ ctivity of deposit insurance in achieving banking stability. If the negative e¤ect of deposit insurance on banking stability is through moral hazard, then deposit insurance will be associated with banking insolvency and credit crunch more than with bank runs. To test this hypothesis, we compute measures of these two types of banking instability. We �nd that deposit insurance per se has no signi�cant e¤ect either on bank insolvency and credit crunch or on bank runs. However, when the deposit insurance is coupled with an increase in credit to private sector, it has a positive and signi�cant e¤ect on bank insolvency and credit crunch but not on bank runs.

Keywords: Banking Crises; Deposit Insurance; Moral hazard (search for similar items in EconPapers)
JEL-codes: E44 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cta and nep-ias
Date: 2011-06-02
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Related works:
Journal Article: Banking instability and deposit insurance: The role of moral hazard (2016) Downloads
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