Explicit Deposit Insurance 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.

Exploring the relationship between explicit deposit insurance, Islamic banks, and financial stability: a comparative analysis

Exploring the relationship between explicit deposit insurance, Islamic banks, and financial stability: a comparative analysis

COVID-19 pandemic and explicit deposit insurance scheme: an analytical study

COVID-19 pandemic and explicit deposit insurance scheme: an analytical study

Impact of Financial Market Development, Financial Crises and Deposit Insurance on Bank Risk

This paper examines the impact of financial market development, financial crises and deposit insurance on bank risk based on macro data of 86 countries during the period 1998-2014. The results show that banking sector development and stock market development have opposing effects on bank risk measured as bank non-performing loan ratio. The introduction of an explicit deposit insurance system plays a significant role in reducing banks’ risk. However, the bank market development after the introduction of this system also increases banks’ risk. The impact of financial market development and deposit insurance system on banks’ risk was more significant before the 2008 financial crisis. It is found that there is a nonlinear relationship between financial market development, deposit insurance, financial crises and banks’ risk. The stock market development has an asymmetric effect on banks’ risk.

Implicit and Explicit Deposit Insurance and Depositor Behavior

Implicit and Explicit Deposit Insurance and Depositor Behavior

Regulatory Regime Governing Deposit Insurance under the Ethiopian Law: A Comparative Review in Light of International Core Principles’ Perspectives

Adopting deposit insurance has become an increasingly custom to ensure the stability of banking systems and protect bank depositors from incurring large losses due to bank failures. Almost in all jurisdictions there are financial safety nets in place to guarantee the safety of the banking system and its depositors. It also inspires trust in the system and safeguards against any shocks. It has got a global recognition which has got the status of international core principles of deposit insurance. Unlike its previous trend, Ethiopia is recently taking significant measures to liberalize the previously state owned service sector. In September 2022, the Ethiopian council of ministers have approved the long awaited act the national financial policy that allows foreign banks to engage in banking business in Ethiopia. This measure is very significant as it marks a breakthrough in the opening of the door for foreign banking investment in Ethiopia. It was revealed in many studies that countries which undergone a finance liberalization have encountered a financial crisis. In most of the states, explicit deposit insurance has been adopted after they have encountered a banking crisis. Unlike these states, Ethiopia has not yet experienced any events of bank failure. However, the country has enacted a regulation that governs the Establishment and Operation of Ethiopian Deposit Insurance Fund ahead of banking liberalization to foreign banks. Hence, this step can be quantified as a wise approach measure that has drawn lessons from other states’ failure. In this paper, a modest attempt is made to comparatively review the Ethiopian deposit insurance regulation in light of the international core principles that serve as standard for harmonization. The Ethiopian deposit insurance legislation stepped miles to accommodate most of the core principles of the IADA and BCBS. The law governs deposit insurance by explicitly separate legislation in addition to the prudent legislation provided for regulating the financial sector. Most of the contents of the legislation comply with core principles of DI. However, there are also loopholes and vagueness in governing specific issues of deposit insurance that should require reconsideration in the subsequent legislation.

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.

WHICH FACTORS MATTER TO DEPOSIT INSURANCE COVERAGE LIMIT? EVIDENCE FROM EMERGING MARKETS

This paper analyzes the effects of the household savings rate, interest rate spread and bank capital to total assets on the relationship between banks’ risk-taking and explicit deposit insurance coverage while controlling for certain macroeconomic factors, bank-level factors and political factors with data from 50 emerging markets. It is found that the U-shaped relationship between banks’ risk-taking and coverage is more apparent in countries with higher household savings rates, lower interest rate spreads or lower bank capital to total assets. The risk-minimizing coverage settings are analyzed and compared with the actual limits for emerging market economies in 2013. For emerging market countries, the effects of the household savings rate, deposit and loan spreads and banks’ capital to assets ratio should be fully considered when setting reasonable deposit insurance coverage, and their interaction with coverage should be emphasized.

Explicit deposit insurance design: International effects on bank lending during the global financial crisis✰

Studies find that during the 2007–2009 global financial crisis, loan spreads rose and corporate lending tightened, especially for foreign borrowers (a flight-home effect). We find that banks in countries with explicit deposit insurance (DI) made smaller reductions in total lending and foreign lending, experienced smaller increases in loan spreads, and had quicker post-crisis recoveries. These effects are more pronounced for banks heavily relying on deposit funding. Evidence also reveals that more generous or credible DI design is associated with a stronger stabilization effect on bank lending during the crisis, confirmed by the difference-in-differences analysis based on expansion of DI coverage during the crisis. The stabilization effect is robust to the use of country-specific crisis measures and control of temporary government guarantees.

The mediating role of competition on deposit insurance and the risk-taking of banks in ASEAN countries

We investigate the mediating function of competition on the association between deposit insurance and the risk-taking of banks during an economic meltdown. In our analysis, we address issues of deposit insurance, competition, bank risk-taking, and bank crisis with explicit deposit insurance and full coverage dummies. Deposit insurance reduces bank risk in the absence of competition by reducing both credit and insolvency risk; however, it exacerbates bank risk and weakens banking stability in a highly competitive market. It also shows that the banking instability in a competitive market is attenuated by deposit insurance during financial crisis. This study offers policy implications.

Do Deposit Insurance Systems Promote Banking Stability?

During the global financial crisis (GFC), regulators and policymakers turned to deposit insurers, along with monetary and fiscal measures, to help restore market confidence and promote financial stability. These events have focused attention on the role of deposit insurers and their role in the banking system. Recent literature reveals that during the GFC, deposit insurance maintained banking stability and successfully prevented customers doing ‘runs’ on the banks. The objective of this paper is to examine the deposit insurance system’s coverage limits and the impact on banking stability, in the context of a jurisdiction’s economic and institutional environment. Our model examines 61 jurisdictions in Asia and Europe with explicit deposit insurance systems, covering the pre- and post-GFC period between 2004 and 2014. We also examine subsets to investigate the effects of the region by comparing Asia and Europe, as well as a subset using the date of establishment of the deposit insurance system to understand if maturity matters. The results indicate that deposit insurance systems, and specifically deposit insurance coverage levels, have both positive and negative effects on banking stability. We find significant associations with certain economic and institutional factors; however, there are differences between the models we ran. These can be ascribed to regional factors and the date of when a deposit insurance system was established.

DEPOSIT INSURANCE COVERAGE LIMIT: HOW MUCH IS ENOUGH? EVIDENCE FROM INDIA

Deposit insurance is one of the safety nets employed by nations to ensure banking stability and depositor protection. Determining the appropriate coverage limit for depositors under a system of explicit deposit insurance is one of the most important policy decisions. This study examines the adequacy of deposit insurance coverage limit, through a case of India, to determine the appropriate level of coverage. The study also investigates the suitability of the recent five-fold increase in the coverage limit of India. Time series data from 1993-94 to 2017-18 has been employed for the regression analysis. India’s data has been compared with several countries with similar deposit insurance characteristics, using a t-test of sample means, over the period 2003 to 2017. The results show that the real coverage limit as well as the coverage ratio in India has been declining over the sample period. Moreover, India’s position has tumbled vis-à-vis its peers in terms of coverage ratio. The findings suggest that the increase in India’s coverage limit, after almost 27 years, is a much-needed move. The increase is enough to bring back India’s coverage limit to comparable levels; however, this one-time increase is not sufficient in isolation of other policy variables.

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.

Bank credit in uncertain times: Islamic vs. conventional banks

This paper explores whether the impact of economic uncertainty on credit growth differs for Islamic vs. conventional banks. Using a sample of 416 banks (58 Islamic and 358 conventional) in 12 countries, the findings indicate that an increase in economic uncertainty significantly decreases the credit growth of conventional banks but does not have any significant impact on Islamic banks’ credit growth. Our results are robust to alternative specifications and addressing endogeneity concerns using GMM estimators. We further observe that our findings are stronger for the following countries: (1) countries with explicit deposit insurance protection system for Islamic banks, (2) lower foreign dominance, and (3) countries with a higher share of deposits and assets in Islamic banks.

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.

Oil prices and bank credit risk in MENA countries after the 2008 financial crisis

PurposeThe purpose of this paper is to investigate the oil price–bank risk nexus by considering the heterogeneity of bank characters.Design/methodology/approachThis paper empirically tests the effect of oil price movements on bank credit risk by using a sample of 279 banks in the Middle East and North Africa countries from 2011 to 2017.FindingsAuthors find robust evidence that the credit risk of bank loan portfolios is negatively associated with increased oil prices. The heterogeneity analysis indicates that the effect of asset quality improvement brought about by rising oil prices is more salient in conventional banks, and banks with small size, low liquidity and whose funding source relies on customers’ deposits.Practical implicationsThe results favor the diversification of bank funding sources, the improvement of a country’s financial development, the adoption of explicit deposit insurance and macroprudential policies, such as countercyclical liquidity buffers, to weaken the adverse impact of oil prices declines.Originality/valueThe present paper enriches the literature of oil price–bank risk nexus by analyzing the heterogeneity of bank characters and advances our knowledge on the determined factors of bank riskiness and vulnerability.

Capital regulation, deposit insurance and bank risk: International evidence from normal and crisis periods

In this paper, we examine the impact of capital regulation on bank risk and the moderating role of deposit insurance on the relationship between capital regulation and bank risk during both normal and crisis periods. Using an international sample of banks from 111 countries, our results show that stringent capital regulation reduces bank default risk, in general, during normal growth period, and this effect is not conditioned by the existence of explicit deposit insurance. Further, stringent capital regulation in place during the pre-crisis period reduces bank default risk during the crisis period, and this effect is stronger for countries with explicit deposit insurance during the pre-crisis period. These results have important policy implications to design the optimal bank regulations.