The Spread of Deposit Insurance and the Global Rise in Bank Asset Risk since the 1970s

Abstract

The paper constructs a new measure of the changing generosity of deposit insurance for many countries, empirically model the international influences on the adoption and generosity of deposit insurance, and show that the expansion of deposit insurance generosity increased asset risk in banking systems. It considers three asset risk measures: higher loans-to-assets, a higher proportion of lending to households, and a higher proportion of mortgage lending. None of the observed increases in these indicators is offset by declines in banking system leverage. The paper shows that increased asset risk explains at least part of the positive association between deposit insurance and the likelihood and severity of systemic banking crises.