Deposit Insurance Coverage, Ownership, and Bank Risk-Taking Behavior: Evidence from Indonesian Commercial Banks

Abstract

In the first part, this paper aims to examine how explicit deposit insurance coverage affects bank stability using the data from the Indonesian commercial banking industry, which offers a unique setting of natural experiment for this purpose. In the second and third parts, this paper studies how market power and ownership structure affect bank stability. My analysis shows that blanket and full guarantee have adverse impact to the Indonesian bank stability, as well as low explicit coverage, suggesting an inverted U-shaped relation. The analysis then shows that higher degree of market power is significantly associated with lower bank stability, supporting the competition-stability hypothesis. Moreover, the analysis reveals that higher cash flow right is associated with lower bank stability, while central government ownership is associated with higher bank stability, as well as foreign and family ownership. Publicly held banks tend to be lower in overall risk, but have relatively higher allowance for loan losses and lower equity-to-asset ratio compared to private banks. Meanwhile, findings on local government and managerial ownership are mixed. The analysis further shows that bank ownership structure interact with the explicit deposit insurance coverage to influence bank stability.