Deposit Insurance Research Articles

Alternative model of Islamic deposit insurance for the Islamic banking system

Purpose This paper aims to develop a novel approach to Islamic deposit insurance, specifically addressing the deficiencies in the current prevailing models of Islamic deposit insurance. Design/methodology/approach The analysis in this paper adopts a qualitative content analysis approach to review the existing literature on Islamic deposit insurance and propose a new model. Findings The proposed model includes a revised scheme. In the event of a bank failure, the funds used to reimburse depositors of the failed bank are divided into two distinct categories. The first category includes nonrepayable premiums that have been previously paid by the failed bank and managed by the Islamic deposit insurance agency or Islamic deposit insurance corporation. The second category comprises qard hasan, an interest-free loan provided by the Islamic deposit insurance agency or Islamic deposit insurance corporation using the deposit insurance funds from the collective pool of premiums of other banks. Practical implications The proposed model ensures that well-managed banks are not unfairly burdened by the failures of their poorly managed counterparts, thus preventing a sense of unfairness and inefficiency. Implementing the proposed model may result in higher business practices and risk management standards, ultimately leading to better depositors’ protection and banking system’s stability. Originality/value This paper offers a significant contribution to the limited literature on Islamic deposit insurance. The proposed model enriches the discourse and offers valuable insights for the future development of Islamic banking.

Moral Hazard Versus Adverse Selection On The People’s Business Credit Program In Indonesia

This paper discusses the behavior of providing bank credit to SMEs during the people’s business credit (KUR) program in Indonesia. Since it was launched in 2007, the average NPL for these loans has increased. This indicates the existence of moral hazard behavior in lending by banks. To prove this indication, this paper implements a threshold regression model. Data covers 38 participating banks, which were observed during Q1-2008 to Q2-2021. The results of data analysis show that moral hazard behavior is indicated when NPL below or equal to 5.87%, on the contrary, experienced adverse selection. Specifically, moral hazard behavior is dominant in the case of investment credit and local government- owned banks. In working capital loans and others, this behavior also occurs, but not as in the case of investment loans. Moral hazard and adverse selection behavior were not detected at all in stateowned banks, while in private banks only occurred at a low level. At the end of the analysis, we also consider the shock effects of the global financial crisis (2008), European crisis (2009), and the Covid-19 pandemic (2020-2021) on the threshold regression model, but the results are negative, thus strengthening our previous findings. In general, the factors that significantly determine the risk of non-performing loans in the people’s business credit program are the increase in credit growth, market share, deposit insurance interest rates, and economic growth as well as a decrease in the benchmark interest rate. However, the specifics are different, both in each type of credit and the type of participating bank.

Liquidity Management and Profitability of Deposit Money Banks in Nigeria: An Impact Analysis

This study empirically examined the impact of liquidity management on profitability of deposit money banks in Nigeria. The specific objectives were to determine the impact of cash management on banks’ return on asset, evaluate the impact of shareholders’ capital on banks’ return on asset and ascertain the relationship between loan to deposit ratio and return on assets of banks. Expost facto design was adopted. The data used for this study were collected from Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporations (NDIC) covering the period 1995-2021. Data collected were analyzed using descriptive statistics and multiple regression analysis. Findings revealed that cash management and shareholders’ capital have significant relationship with banks’ return on assets. It however showed that there is significant relationship between loan to deposit ratio and return on assets. Based on the findings, it recommended that the bank management device efficient cash management policies to enhance their profitability

The Effect of Job Loss on Bank Account Ownership

AbstractWe estimate the effect of job loss on households’ bank account ownership using novel data: Federal Deposit Insurance Corporation (FDIC)‐sponsored biennial supplements to the Current Population Survey (CPS), linked to respondents’ work history in surrounding months constructed from the Basic Monthly CPS. Leveraging differences in the timing of unemployment spells across households, we show that job loss leads to a large decrease in the likelihood of having an account among the lower‐income, renter households we study. Job loss also leads to increased use of other products and services that might substitute for a bank account, including prepaid cards, check cashing, and money orders.

Mutual insurance for catastrophe hazards: Case of deposit insurance

AbstractDeposit insurance involves catastrophe risk because bank failures spike during a banking crisis. Although mutual insurance is ill‐suited for catastrophe risk, the US government structures deposit insurance like a mutual company owned by policyholders. Furthermore, an intertemporal mispricing resulting from a dividend‐surcharge arrangement produces several problems. Most importantly, it worsens moral hazard. Through dividends and surcharges, deposit insurance transfers the premium burden from high‐risk banks to low‐risk banks and in effect erodes the charter value of low‐risk banks. In addition, high‐risk banks taking catastrophe risk can outperform low‐risk banks for many years in a row, putting pressures on managers of low‐risk banks. Owing to these factors, an underpricing of catastrophe risk before its realization can ratchet up risk‐taking by banks. Other problems with the intertemporal mispricing include making the banking business more procyclical, distorting the prices of banking products, and exposing taxpayers to asymmetric downside risk. To ensure fair competition and improve economic efficiency, the government should set the insurance premium based not on the realized loss but on the expected loss.

THE SMALL CLAIM COURTS DURING COVID-19: ANALYSIS OF INDONESIAN BANKS’ CLAIMS ON BAD CREDIT

The purpose of this study is to discuss the suitability of small claim courts to solve bad credit claims that are filed by banks as an alternative to dispute contract defaults. The study analyses the trend of banks’ small claims during the COVID-19 pandemic. This study employed an empirical normative approach. It combines a normative legal approach and additional empirical elements in the form of cases and decisions. The results show that some of the regulations that were released before the pandemic, such as the Regulation of the Supreme Court Number 4 of 2019 on the Settlement of Small Claim Courts, provide benefits for banks to settle credit disputes because they allow various expansions. The Regulation of the Supreme Court Number 3 of 2018 on The Administration of Cases in Electronic Courts has introduced some electronic applications. Although business (bank) litigation remains dominant, the trend of bank claims in the middle of the COVID-19 pandemic has dropped. In contrast, the trend of individual claims has increased significantly. The decline is influenced by countercyclical policies that are issued by the Financial System Stability Committee. The committee members consist of representatives of the Ministry of Finance, Bank Indonesia, the Financial Services Authority, and the Deposit Insurance Corporation. It aims to handle and cope with the banks’ crisis related to the pandemic.

Implementation of the mechanism of systemic risk internalisation in the deposit market (pigou tax principle)

The deposit guarantee fund’s rate cap mechanism was supplemented by a systemic risk fee based on the Pigou tax principle. The additional systemic risk fee was introduced to curb overly aggressive price competition in the deposit market by creating additional explicit financial costs that can offset the gains to individual banks from increasing their deposit market share. However, the existing inelasticity of the implemented mechanism, manifested by the lack of stable pressure across the entire range of rates, necessitates its reform. In this article the authors reveal the details of the implemented mechanism of internalisation of systemic risk in the deposit market, the reasons that prompted its implementation, assessment of its success and ways of further reform.

Basis for Legislating to Institutionalize Personal Deposit Protection System

The article conducts a legal analysis of approaches to understanding the nature of the powers of the Deposit Guarantee Fund for Individuals, impacting the institutional reform of the respective deposit guarantee system. The author delineates the powers of the Fund. According to the proposed approach, the powers of the Fund regarding the functioning of the deposit guarantee system are divided into two subgroups: managerial and entrepreneurial. Managerial functions aim to institutionalize the deposit guarantee system itself. They are oriented towards the interaction of the Fund with banks participating in this system rather than towards depositors. Entrepreneurial powers essentially represent a specialized form of commercial activity, involving measures to preserve and increase the funds collected from participants in the deposit guarantee system. Powers related to ensuring the functioning of the deposit guarantee system for individuals, both managerial and entrepreneurial, are inherent to the Fund and require further development in accordance with international standards and Ukraine’s European integration commitments. It is essential to ensure a balance between state intervention and self-regulation through market instruments in the relevant sphere. Additionally, regulatory, administrative, and supervisory powers are separately highlighted, primarily concerning the removal of insolvent banks from the market and bank liquidation procedures. During the institutional reform of the Fund, it is necessary to review these powers, taking into account their nature and the constitutional regulation of relevant legal relationships. In particular, it should be noted that the concepts of “deposit guarantee” and “deposit insurance” are legally distinct in nature. This is a crucial aspect that further elucidates the functional orientation of the Fund’s powers, the specific procedure of its formation, and, most importantly, its role and significance in the banking system of Ukraine. It is critically important for the entire deposit guarantee system for individuals, as well as the removal of banks from the market to be legally transparent and predictable. To achieve this goal, all main mechanisms, procedures, and forms of activity should be appropriately regulated at the legislative level. In this regard, the experience gained from the relevant legislative regulation of the activities of state “regulators” and the functioning of self-regulatory organizations in related fields can serve as a basis for further institutional reform of the deposit guarantee system in Ukraine.

Asset Separation as a Bank Failure Management Tool

The article is devoted to the legal aspects of an asset separation tool as a bank failure management tool. Asset separation tool is provided by FSB Key Attributes of Effective Resolution Regimes for Financial Institutions and Directive 2014/59/EU (Bank Recovery and Resolution Directive, or BRRD). However, it has not been implemented in Ukrainian legislation to date. The article defines key elements required for effective transposition of the asset separation tool. It is fundamentally important to ensure clarity in the authority’s powers to conduct non-performing assets transfer to an asset management company and powers to transfer them back in cases provided in the law, as the framework should be predictable for all stakeholders. General rules for obtaining the consent of owners of the failed banks or any other parties should not be applicable. The assets should be transferred to the asset management company with the view to value maximization or orderly liquidation. An asset separation tool is not a standalone tool and shall be applied along with other tools to deal with bank failures. The article also defines key safeguards and requirements for an asset management company to operate efficiently and mitigate risks of political interference. Most asset management companies designed for bank failure management are owned by the state, and in line with this the BRRD envisages that an asset management shall wholly or partially belong to the state or a resolution authority. The BRRD provides that the resolution authority shall approve a statutory document of the asset management company, management and their remuneration, as well as the strategy and risk profile of the company. At the same time, there should be safeguards to ensure that the asset management company should be commercially oriented and operationally independent. The most efficient asset management companies have a narrow mandate. Special powers may be introduced for an asset management company when the general framework has impediments to the efficient operation of an asset management company. It should be noted that the asset management company has a temporary nature and should be wound up once its goal is reached. Necessary incentives should be introduced in this regard. This could be a sunset clause, defined interim key performance indicators, which should be flexible and regularly reviewed, and financial incentives for staff of the asset management company. It is suggested to introduce amendments to the Law of Ukraine ‘On household deposit guarantee system’ to implement the particularities described in the article.

Making depositors greedy and careless: Government safety nets and the degradation of depositor discipline

AbstractIn emerging countries, deposits play an important role in banks' total funding; hence, depositor discipline may significantly impact banking performance and financial system stability. This paper investigates depositor discipline before and after Vietnam's 2008–2011 banking crisis when depositors had little experience regarding bank bailouts and the amount of deposit insurance was limited to a low cap. The study points out that before the crisis, the level of deposit financing in banks depended on both the interest rates offered and on measures of banks' risk‐taking. After the crisis, given that the Vietnamese government prevented all bank failures to ensure economic, political, and social stability, depositors still react to interest rate changes, but substantially less to risk. This suggests that they have learned that their deposits are safe regardless of the risk the bank is taking.

DEPOSIT INSURANCE SYSTEM IN GEORGIA AND WORLD TRENDS

The deposit insurance system is one of the main challenges of Georgian Banking regulation, which serves as a safety pillow of financial stability. Over the past 5 years, Georgia has increased the minimum deposit insurance limit from 5,000 GEL to 15,000 GEL per bank in order to achieve greater stability in the financial market. Georgia has already made a decision to increase the limit to 30,000 GEL from January 1, 2024. We examined the impact of the deposit insurance system on the safety of customers of banking institutions by comparing the volume of accounts/deposits protected by the system with existing practices in neighboring economies. We find that increasing attention to the importance of deposit insurance has led to an increase in the interest of foreign depositors and investors in placing funds in Georgian banks, which contributes to the improvement of international ratings and credit worthiness of Georgian banks. Keywords: Deposit insurance, cost of deposit funding, resolution.

The mediating role of capital on deposit insurance and financial stability: evidence from Islamic and conventional banks

PurposeThis study aims to evaluate the interaction between bank capital and explicit deposit insurance scheme (DIS) on the financial stability of Islamic and conventional banks.Design/methodology/approachThe author's sample covers 52 Islamic and 108 conventional banks operating in 12 countries over the period 2000–2021 using the random-effects generalized least squares (RE-GLS) regression technique.FindingsThe author's results reveal that bank capital negatively mediates the relationship between explicit DIS and the financial stability of both Islamic and conventional banks. Additionally, explicit DIS has a positive impact on the financial stability of conventional banks. However, the results are mixed for Islamic banks, as the effect of explicit DIS is positive for the Middle East and North Africa (MENA) region but negative for the South and Southeast Asia (SSA) region. Finally, the interaction between explicit DIS and the COVID-19 pandemic has a negative effect on conventional banks operating in the MENA region, while it has a positive effect on Islamic banks operating in the SSA region.Research limitations/implicationsThe findings of this paper have important implications for regulators in evaluating DIS policies and in anticipating any potential adverse consequences that might arise for both Islamic and conventional banks in normal and crisis times. Policymakers should strive to preserve the benefits of DIS while mitigating the destabilizing effects of its interaction with capital ratios.Originality/valueThis study introduces a novel aspect by examining the mediating role of capital in the relationship between explicit DIS and the financial stability of Islamic and conventional banks.

Push – pull – mooring determinants of non-Muslims’ withdrawal from Islamic banking: evidence from Malaysia

PurposeThis study aims to attempt to investigate the factors that influence non-Muslims’ withdrawal behavioural intention from Islamic banking in Malaysia.Design/methodology/approachThe push–pull–mooring approach is used to examine the determinants of withdrawal intention by non-Muslims from Islamic banking in Malaysia. Variables used in this study include religiosity (RELG) under push, deposit guarantee (DG), rate of return (RR), Islamic banks’ specific factors (IBSF) under pull and mooring factors as social influence (SI) and voluntary switching (VS) as the determinants of withdrawal intention from Islamic banking. In this study, the SPSS Statistics Version 22 and smart partial least squares were used to measure the withdrawal level.FindingsThree variables, namely, SI, RR and IBSF are found to significantly influence the withdrawal behaviour intention. Meanwhile, three other variables, namely, RELG, DG and VS are not significant.Practical implicationsThis study provides valuable insights pertaining to non-Muslim consumer withdrawal behaviour from Islamic banks. Bank managers, marketers and regulators could use these findings in developing effective strategies to increase and retain customer withdrawal.Originality/valueThis study expands the understanding of key determinants of the non-Muslim withdrawal behaviour from Islamic banks in Malaysia. To the best of the authors’ knowledge, this research is among the pioneer empirical study to assess the issue.

Prepaid cards and the unbanked in the U.S.: financial innovations and financial inclusion

PurposeFinancial inclusion is measured by the number of people who use the formal financial system and banks in particular. Limited access to formal banking services and the existence of unbanked households is a main policy concern. The authors evaluate how the use of prepaid (reloadable) debit cards by unbanked households affects financial inclusion and specifically the potential for these households to participate in the formal financial system and open a bank account.Design/methodology/approachThe authors apply matching models to analyze survey data from the Federal Deposit Insurance Corporation National Survey of the Unbanked and Underbanked Households from 2009 to 2019 and evaluate how prepaid cards use affects plans to open a bank account.FindingsUnbanked households who use prepaid cards are 5% less likely to open a bank account compared to the matched nonusers of prepaid cards. In addition, prepaid card users are 12% more likely to use nonbanks to transfer money/transact online and 18% more likely to have obtained loans from alternative financial services providers compared to the matched unbanked nonusers of prepaid debit cards.Originality/valueNo previous work has estimated the causal impact of use of prepaid cards on financial inclusion.

Peran Otoritas Jasa Keuangan dan Lembaga Penjamin Simpanan dalam Menjaga Stabilitas dan Keamanan Sistem Keuangan

The Financial Services Authority (OJK) is an institution that is independent and free from interference from other parties that has the functions, duties, and authority to regulate, supervise, examine, and investigate as referred to in Law No. 21 of 2011 concerning OJK. The establishment of this banking financial services sector supervisory institution was established in accordance with the mandate of Law Number 3 of 2004 concerning amendments to Law Number 23 of 1999 concerning Bank Indonesia. This research uses the literature review method. This research combines various sources of literary information, namely books, scientific journals, newspapers, the internet, and theses related to the topic, namely "The Role of the Financial Services Authority and the Deposit Insurance Corporation in maintaining the Stability and Security of the Financial System". The financial system has a very important role in the economy. Instability of the financial system can cause economic turmoil. Restoring an unstable economic system requires very high costs and a long time to restore public confidence in the financial and banking systems. LPS has two functions, namely protecting bank customer deposits and liquidating or liquidating banks that are known to be in poor health or insolvent. LPS has successfully strengthened and restored public confidence in the financial and banking system.

Policy Portfolio for Banks: Deposit Insurance and Liquidity Injection

Policy Portfolio for Banks: Deposit Insurance and Liquidity Injection

Moral Hazard Issues in Deposit Insurance

Moral Hazard Issues in Deposit Insurance

Deposit Insurance with Caps: Does it Prevent Runs? 

Deposit Insurance with Caps: Does it Prevent Runs? 

Deposit Insurance and Bank Funding Stability: Evidence from the TAG Program

Deposit Insurance and Bank Funding Stability: Evidence from the TAG Program

Оцінювання незалежності фонду гарантування вкладів фізичних осіб

According to the Key Principles of Effective Deposit Insurance Systems, an important guarantee of the proper functioning of deposit insurance is the independence of the deposit insurance body. The aim of the study is to develop a scientific and methodological approach to assessing the independence of the Deposit Guarantee Fund. The methods used in the study are the calculation of the composite indicator, the use of scores, analysis and synthesis. The publication formulates the criteria for the independence of the Natural Persons Deposits Guarantee Fund by its components: institutional independence – the term for which the managing director is appointed, the term for which the members of the administrative council are appointed, the requirements for the managing director when appointing to the position, the requirements for the members of the administrative council when appointing to the position, the procedure for appointing the managing director, the procedure for dismissing the managing director, the procedure for appointing members of the administrative council, the procedure for terminating the powers of the members of the administrative council, the conditions for the dismissal of the managing director, the conditions for terminating the powers of the members of the administrative council, the membership of directors in political parties, the ownership of corporate rights by managers; operational independence – regulation-making activities, judicial immunity of the Fund, requirements for avoiding conflicts of interest, prohibition to interfere in the activities of the Fund, international activities of the Fund, access to bank secrecy, administrative powers; financial independence – formation of internal organizational structure, sources of funding, budgeting, financial control procedure. In the context of improving the institutional independence of the Deposit Guarantee Fund, it is proposed to increase the term for which the managing director and members of the administrative board are appointed; to refer the issue of appointment and dismissal of the managing director of the Fund to the competence of the Verkhovna Rada of Ukraine on the proposal of the President of Ukraine; to regulate the membership of the Fund’s directors in political parties; to include independent members in the administrative board of the Fund. In order to strengthen operational independence, it is important to provide the Deposit Guarantee Fund with the right of legislative initiative, as well as access to bank secrecy. Improving the financial independence of the Deposit Guarantee Fund requires increasing the level of independence of financial control, as well as reducing the risk of non-repayment of the Fund’s debt to the State.