Abstract
The relationship between deposit insurance and banking risks has been widely studied, but has been the subject of relatively few empirical studies, especially for Vietnamese banking system. This research contributes to the existing literature by exploring the effect of deposit insurance on banks’ risk taking in Vietnam. The paper employs 7 bank specific variables and 2 macroeconomic variables, as well the premium paid by banks. The results suggest that deposit insurance does impact banks’ risk taking incentive but it has different effects on each type of risk. It is concluded that credit, default and leverage risk are found to have a negative relationship with deposit insurance, while asset risk and deposit insurance have a positive relationship.
Highlights
The Great Depression during 1929-1933 raises the need to develop a financial institution specialized in protecting and maintaining the confidence of depositors and coordinating with government agency to preserve financial system stability
The results suggest that deposit insurance does impact banks‟ risk taking incentive but it has different effects on each type of risk
It is concluded that credit, default and leverage risk are found to have a negative relationship with deposit insurance, while leverage and deposit insurance have a positive relationship, which may help banks and supervisors in their decision for the deposit risk premium
Summary
The Great Depression during 1929-1933 raises the need to develop a financial institution specialized in protecting and maintaining the confidence of depositors and coordinating with government agency to preserve financial system stability. The first deposit insurance scheme sponsored by the federal government was officially introduced in the US in 1933 with the. 2020, Vol 10, No 2 establishment of the Federal Deposit Insurance Corporation. It was not until the last two decades that deposit insurance was studied comprehensively. The financial crisis that started in 1997 is one of the most significant economic events over the last 50 years. World Bank (2001), using increases in the stock of public debt to GDP in the crisis year as a measure, figures out that total fiscal cost of Thailand and Korea during 1997 banking crises surpassed 30 percent of total GDP, while in Indonesia it is 50 percent of GDP
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