Implicit Guarantees, Governance and Banks’ Risk-Taking Through the Crisis

Abstract

Using bank level data for industrialized and emerging market economies we estimate how explicit deposit insurance and factors contributing to implicit insurance affect banks’ banks risktaking; possibly in interaction with governance characteristics of banks and countries. The empirical analysis for 764 banks in 34 countries covers the years 2001-2009. Proxies for banks’ risk are strongly influenced by the exclusion or inclusion of the crisis years. Implicit insurance of banks’ creditors is captured both by an expected U-shaped relationship between explicit deposit insurance coverage and banks’ risk-taking, and by factors influencing the likelihood of bail-outs of individual banks. Country and bank specific institutional factors, including governance characteristics, are expected to affect the sensitivity of risk-taking to explicit and implicit insurance. We analyze specifically the roles of ownership-concentration, shareholder rights and creditor rights in risk-taking.