Explicit Deposit Insurance Scheme Research Articles

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.

Covid-19 Pandemic and Explicit Deposit Insurance Scheme: Analytical Study

Covid-19 Pandemic and Explicit Deposit Insurance Scheme: Analytical Study

Liquidity And Deposit Insurance: The Case Of Deposit-Taking Microfinance Institutions In Low-Income Sub-Saharan Africa

The objective of this study was to examine the relationship between liquidity and deposit insurance of Deposit-taking Microfinance Institutions (DTMFIs) in Low-Income Sub-Saharan Africa (LISSA). Several DTMFIs in the region defaulted in meeting withdrawals on deposits and collapsed with depositors’ funds. The failure of DTMFIs to be liquid has dire consequences such as contagion risk due to the sudden and unexpected deposit runs and oblivion of depositors’ funds, which further condemn the small savers into extreme poverty levels. Panel data from the Microfinance Information Exchange for the years 2006 to 2017 of 64 DTMFIs sampled across 18 LISSA countries was utilised. The estimated random effects results showed that explicit deposit insurance is positive and significantly related to liquidity. Additionally, the capital adequacy ratio and the Basel implementation dummy are positive and significant determinants of liquidity. The study concluded that designing and implementing explicit deposit insurance schemes mitigates liquidity risk in depository microfinance and maintaining adequate capital adequacy levels and implementation of Basel recommendations improves the liquidity positions of the LISSA DTMFIs. The study recommended formulation of deposit insurance policies that embrace microfinance deposits of all types and adherence to the Basel capital adequacy standards complements deposit protection in hedging liquidity risk.

Blessing or curse? Government funding of deposit insurance and corporate lending

A key policy to limit the possibility of bank runs is an explicit deposit insurance scheme, which can be either privately or government funded. Using syndicated loans from 63 countries during the period 1985–2016, we study the effect of government involvement in deposit insurance funding on price and non-price characteristics of loans. We show that changes from purely private-funded to either government-funded or jointly funded deposit insurance increase all-in-spread-drawn by approximately 4.6 %, further increase loan fees, decrease loan maturity, and increase the use of performance pricing provisions. Our findings are consistent with the moral hazard problem behind government-funded deposit insurance schemes.

The reform of deposit insurance in China: how China evolves from implicit deposit insurance to explicit deposit insurance

ABSTRACT Since the global financial crisis (GFC), deposit insurance, as an essential part of the financial safety net, has been significantly developed to be an effective mechanism to contain bank runs and market fears. Unlike many advanced markets having deposit insurance for years, China has just launched its first explicit deposit insurance scheme, effective from 1st May 2015, remarking that the Chinese financial safety net has been primarily completed. This article not only provides a retrospective analysis of the development of deposit insurance in China, but also comprehensively examines the features of the first Chinese deposit insurance scheme with reference to international principles and standards. Through the analysis, this research tries to explore the features of the first Chinese deposit insurance scheme and argues that the Chinese deposit insurance scheme has to be well designed in consideration of the country specifics.

Bank Liquidity Creation, Regulations, and Credit Risk

AbstractThis study employs bank‐level data covering 3007 individual banks (commercial, savings, and others) in 27 Asian countries to investigate the determinants of bank liquidity creation, considering four conditional factors over the period 1999–2013: credit risk, deposit insurance, financial market regulations, and bank reforms. Bank liquidity creation is shown to be statistically and economically significantly positively related to real economic output, as well as illiquid assets and core deposits. Larger banks increase their liquid assets ratio, but decrease their credit commitment. Countries implementing an explicit deposit insurance scheme may lead to moral hazard and excessive bank risk taking. If supervisory authorities can force a bank to change its internal organizational structure, or have more power to take legal action against external auditors for negligence, or increase capital requirements, then banks generally reduce their lending activities. Nevertheless, larger banks are able to increase liquid assets and lending to those countries with stricter financial regulations.

Deposit Insurance and Design: Effects on Bank Lending During the Global Financial Crisis

This paper investigates how explicit deposit insurance (EDI) scheme in place influence bank lending during the global financial crisis. Earlier studies reveal tightened overall corporate lending, even lesser amount to foreign borrowers (a “flight home” effect) charging higher interest rates during the 2007-2009 crisis. We report that banks in countries with EDI are associated with smaller reductions (increases) in lending (spreads) and quicker post-crisis recovery. These effects are more pronounced for banks heavily relying on deposit funding. Evidence also reveals that more generous or credible deposit insurance designs are associated with stronger stabilization effects on bank lending during the crisis.

THE TRAVELS OF A BANK DEPOSIT IN TURBULENT TIMES: THE IMPORTANCE OF DEPOSIT INSURANCE DESIGN FOR CROSS‐BORDER DEPOSITS

We examine the impact of the existence on an explicit deposit insurance (DI) scheme and its design features on bilateral cross‐border deposits (CBD) in a gravity model setting. We find that both the absolute quality of a country's DI and its relative quality vis‐à‐vis other countries' DI generally affect depositor behavior. However, during systemic banking crises, cross‐border depositors primarily seek countries with the best DI schemes. Similarly, during the 2008–2009 great financial crisis, the emergency actions taken by the governments, which supply and maintain these safe havens, have led to substantial relocations of CBD. (JEL F34, G18)

How do regulatory ability and bank competition affect the adoption of explicit deposit insurance scheme and banks’ risk-taking behavior?

In this study, we investigates how regulatory ability and bank competition affect the adoption of explicit deposit insurance scheme (eDIS) and banks' risk taking behavior under the scheme. We build a regulator-bank dynamic game model to explain why the implicit deposit insurance scheme is not the optimal choice when the regulator's regulatory ability is high. We also find that excessive competition makes banks take extreme risk and in such case eDIS is ineffective in preventing the occurrence of banking crises. Otherwise, eDIS can prevent the occurrence of banking crises effectively although banks take excessive risk under the scheme. Our model identifies that the effects of bank competition and regulatory ability on the banks' risk incentives created by eDIS are interdependent. Empirical analysis on 190 countries worldwide confirms that: (1) higher regulatory ability increases the probability of eDIS adoption. (2) Under the eDIS, less bank competition and higher regulatory ability could reduce the risk of banking during normal times. In addition, increased regulatory ability significantly weakens the positive effect of banking competition on banking risk. (3) Under the eDIS, more bank competition increases the probability of banking crisis occurrence.

The impact of bank competition and concentration on bank risk-taking behavior and stability: Evidence from GCC countries

This paper presents a comprehensive assessment of the impact of competition on bank fragility pre and post financial crisis period in the GCC banking market as measured by bank risk-taking behavior and bank stability during the period 1998–2016. Our results indicate that a higher level of bank competition and the greater degree of concentration adds to financial fragility. The findings further shows that during the 2008 crisis, lower bank competition maintain the stability of GCC banks. We also find that lower level of competition and lower concentration in the banking market increases the risk-taking behavior of the low capitalized, low liquid and small banks which add to fragility in the banking system. Our findings suggest that countries with greater capital stringency, greater supervisory power, greater market discipline, and private monitoring, with explicit deposit insurance schemes, higher shareholder protection, and higher legal efficiency decrease banks’ risk-taking and increase their stability. We also find that greater regulatory restrictions and higher creditor protection decrease banks’ stability and increase risk in concerned countries. We find support for both competition-fragility and competition-stability hypotheses in the GCC banking market. The results also confirm that the use of a single measure of competition is insufficient to assess the role of competition in banking stability.

Deposit insurance, bank exit, and spillover effects

Abstract This study resolves a puzzle in the banking literature: why do an increasing number of countries adopt a deposit insurance scheme (DIS) while prior studies have shown that it increases the likelihood of banking crises? Using a dataset of 64 countries over the period 1970–2009, our study shows that the adoption of a DIS is associated with a 2.0–4.7 percentage points higher likelihood of banking crises (the “direct effect”), while it is associated with a 10.1–11.1 percentage points lower likelihood of non-banking financial crises (the “spillover effect”). Since the “spillover effect” is larger than the “direct effect”, a DIS actually increases overall financial stability. Additionally, we analyze the mechanisms through which a DIS affects financial crises. First, we highlight the existence of the implicit guarantee and examine its interaction with an explicit DIS. Second, we investigate the substitution effect between banking crises and non-banking crises.

Depositor preference and deposit insurance schemes — challenges for regulatory convergence and regulatory coordination in Asia

This article examines the main challenges for achieving regulatory convergence and coordination for depositor preference rules and explicit deposit insurance schemes at the regional level in Asia. The increasing regionalisation and integration of banking activities in Asia, as reflected in initiatives such as the ASEAN Banking Integration Framework, suggest a need for co-operation in the area of depositor protection in order to maximise the benefits of banking integration and achieve regional financial stability. However, the level of integration and financial stability is likely to be limited by national regulatory sovereignty and control over depositor protection mechanisms and the absence of a political commitment for ex ante cost-sharing and burden-sharing at the regional level.

Political institutions and bank risk-taking behavior

This paper examines the impact of political institutions on bank risk-taking behavior. Using an international sample of banks from 98 countries over the period 1998–2007, I document that sound political institutions stimulate higher bank risk-taking. This is consistent with the hypotheses that better political institutions increase banks’ risk by boosting the credit market competition from alternative sources of finance and generating the moral hazard problems due to the expectation of government bailouts in worst economic conditions. While it is contrary to the hypotheses that better political institutions decrease banks’ risk by lowering the government expropriation risk and the information asymmetries between banks and borrowers. The results are robust to a number of sensitivity tests, including alternative proxies of bank risk-taking and political institutions, cross-sectional bank- and country-level regressions, endogeneity concerns of political institutions, country income levels, explicit deposit insurance schemes and sample extension from 1998 to 2014. I also examine the interdependence between political and legal institutions and find that political and legal institutions complement each other to influence bank risk-taking behavior.

How Do Regulatory Ability and Banking Market Structure Affect Explicit Deposit Insurance Scheme Adoption and Bankss Risk Taking?

This study investigates how regulatory ability and banking market structure affect explicit deposit insurance scheme (eDIS) adoption and banks’ risk taking under eDIS. We find that: (i) The regulatory ability exists a threshold if the government regulator’s regulatory ability above the threshold, the implicit deposit insurance scheme (iDIS) is not the optimal choice. (ii) Excessive competitive banking market structure leads to the existence of an invalid region of both eDIS and iDIS, in which the bank takes extreme risk. (iii) In the valid region of eDIS, the bank takes excessive risk and the effects of banking market structure and regulatory ability on the bank’s risk are interdependent. Empirical analysis on 190 countries worldwide 1996-2011 confirms that regulatory ability is the determinant of eDIS adoption, whereas the more competitive banking market structures are more prone to experience a banking crisis. The results also indicate a negative effect of regulatory ability on banking risk, and the effect of market structure on banking risk is negative either, as predicted. Moreover, the results support the prediction that the increase of regulatory ability weakens the negative effect of banking market structure on banking risk.

Anatomy of international banking crises at the onset of the Great Recession

The paper examines a wide range of potential predictors of 25 international banking crises that broke out in 2007–2011 on the basis of cross–sectional logit models and the BCT (binary classification tree) algorithm, a novel technique in assessing the causes of banking crises. The major determinants of the crises arise from an excessive credit depth (measured as private credit to GDP ratio) and illiquidity of the banking sector (credits to deposits ratio). The implementation of explicit deposit insurance schemes is also a pro-crisis factor due to the moral hazard effect they tend to cause. On the contrary, higher values of remittance inflows to GDP decrease the susceptibility to banking crises. These findings are robust under both methodologies. Lower bank concentration, bigger values of cost to income ratios as well as a higher level of economic liberalization and inflation make countries more vulnerable to banking crises, as derived from the logit analysis. The pre-crisis credit depth, credits to deposits ratio, inflation, financial openness and net interest margin are also significant predictors of the crisis costs proxied by the peak ratio of non-performing loans (NPL) relative to gross loans, the increase in public debt to GDP ratio and real output losses.

Measuring the Severity of a Banking Crisis and Finding Its Associated Factors: How Are the Factors Different for Simple and Severe Banking Crises?

This study measures the severity of a banking crisis by using its duration and the cost. Using this new methodology, we find that the factors associated with a severe banking crisis are not quite the same as those associated with a simple banking crisis. An ordered logit model and a large panel data set were used for this study. One of our major findings is that there exists a four-year time lag between an economic boom, or financial system liberalization, and the occurrence of a severe banking crisis in a country. This indicates that banking problems start much earlier than the time when they are revealed as banking crises. This study also finds that the lower the remains of a past banking crisis, the higher the probability of a severe banking crisis. It could be due to less-attentiveness of banking sector policy-makers with elapsed time. A high rate of inflation, existence of an explicit deposit insurance scheme, and a weak institutional environment are found to be common factors positively associated with both simple and severe banking crisis.

Power of a Deposit Insurance Scheme’s Authority and a Banking Crisis

Using a large panel data set, this study analyzes effects of empowering the authority of an explicit deposit insurance scheme (EDIS) on banking crises. Findings suggest that the use of an EDIS increases the probability of a banking crisis. Moreover, this probability is greater if the EDIS is not empowered for the direct intervention in banks’ operations—e.g., the power to cancel or revoke banks’ deposit insurance contracts, or situations in which deposits are not explicitly covered before a bank failure but are to be covered after the failure . The probability is even greater if the EDIS is used in a less developed country while the scheme is not empowered for the direct intervention in bank operations or uncovered deposits are to be covered ex post to a bank failure.

Bank Deposit Insurance, Moral Hazard and Market Discipline: Evidence from Central and Eastern Europe

There is a considerable debate on the role played by deposit insurance on market discipline in the banking industry. Using data for 203 banks across 10 Central and Eastern European countries, this paper empirically analyzes the implications of the implementation of explicit deposit insurance schemes for bank risk taking and market discipline. We show that the introduction of explicit deposit insurance in the 90’s has lead to higher risk-taking incentives. However, we also show that explicit deposit insurance has strengthened market discipline. Moreover, we find that bank ownership (foreign vs. domestic), institutional and legal factors, and resolution strategies adopted when the country has experienced banking crises impact bank risk and the effectiveness of market discipline.

Deposit insurance scheme and banking crises: a special focus on less-developed countries

This study analyzes the effect of an explicit deposit insurance scheme (EDIS) on the probability of a banking crisis in a country while taking the country’s overall economic development into account. The panel data for the period of 1980–2003 include all the countries having the data on an EDIS. The major finding is that if the interaction between a country’s overall economic development and its use of an EDIS is not controlled for, the country’s use of the EDIS increases the probability of a banking crisis. This increase is greater the more inefficiently designed the EDIS is. However, once the interaction between the overall economic development and the use of the EDIS is controlled for, it is found that the EDIS itself is not a significant factor of a banking crisis. In that case, the less developed the country is that is using an EDIS, the higher the probability of a banking crisis.

Investigating the Determinants of the Extent of Asia-Pacific Banks' Derivative Activities

We present an analysis of the determinants of Asia-Pacific banks' extent of derivative activities. Our findings suggest that the probability of financial distress and economies of scale arguments are important in this regard. Further analyses reveal that Asia-Pacific dealer banks tend to use more foreign currency derivatives while interest rate derivatives are generally used for hedging purposes. Our findings also indicate that banks located in countries with an explicit deposit insurance scheme engage in greater derivative activities. Such behaviour may reflect either hedging or speculation.