Explicit Deposit Insurance Research Articles

The Latest Case of Information Asymmetry Issue on the Retail Core Banking Services Market in the Czech Republic

The paper is focused on the latest information asymmetry issue in the Czech Republic on the retail banking services market. The problem considers credit union (savings cooperative) business that seemed stable after the problematic restructure 10 years ago. But during this January the payment from Deposit Insurance Fund of the Czech Republic had to compensate the consumers of the MSD credit union. This subject provided services with higher interest rates even during the last years of technically zero interest rate of the central bank. A question information asymmetry and the moral hazard arose again. All that is written in famous study for European central bank by VesalaetGropp supporting the explicit deposit insurance system is correct but the conditions has partially changed. Credit unions try to compete with banks undertaking a higher level of credit risk but still being within Basel II accords. The paper is considering the question of the future development – to try to compete with the conventional banks as FIO credit union successfully did or to return to “Austrian” model. Next future trend is outlined in sum up of the deposit insurance system characteristics backed by other several studies. Also the problem of information asymmetry overcome is being discussed with the result that mostly used monitoring indicator cannot be applied to credit union market.

The Global Financial Crisis and Its Impact on Australian Bank Risk

AbstractThis paper examines the global financial crisis (GFC) and its impact on Australian banking risk. An augmented market model is developed to identify changes in listed Australian bank systematic risk in relation to three key events: the GFC's start in August 2007, the market downturn in Australian and global share markets in January 2008, and the announcement of Australia's Deposit and Wholesale Funding Guarantee (DWFG) scheme on 12 October 2008. The study also examines changes in bank systemic risk during these event periods. The Australian market offers a unique opportunity to observe the impact of the introduction of the DWFG in that it lacked any explicit deposit insurance prior to the crisis. Initially, the crisis period had little impact on bank systematic risk while bank systemic risk increased considerably. The share market downturn caused a marked increase in both systematic and systemic risks for Australia's major internationally connected banks followed by a reduction in both systematic and systemic risks with the introduction of the guarantee scheme for all Australian banks.

Does Deposit Insurance Increase Moral Hazard in Banks? The Case of the Australian Financial Claims Scheme

In this paper we analyze the relation between deposit insurance, bank risk and bank stability.Although there is a voluminous literature on the impact of deposit insurance on bank stability and bank risk, the consequences of deposit insurance remain controversial. In particular, deposit insurance is widely offered in a ever growing number of countries as part of a financial safety net to promote stability even if there is a wide empirical evidence relating to the failure of deposit insurance in maintaining banking stability because of the well known moral hazard problem.In order to study these relations we chose the particular case of the Australian "Financial Claims Scheme", because Australia was one of the few developed countries that did not have explicit deposit insurance facilities in place. With the growing uncertainty surrounding the health of the global financial markets in 2008, the Government decided to introduce protection for deposits and wholesale funding. So, deposit insurance measures were introduced not because of a serious threat to domestic stability of the banking system but mainly as a precautionary action to face deteriorating conditions in overseas financial markets.By using a probit regression model we found that in Australia the introduction of a deposit insurance scheme produced a decrease in the bank risk, that is banks are less risky than the period before. Results also demonstrate that the introduction of the scheme produced an increase in the bank stability and generalizing an increase in the stability of the Australian banking system as well.

Managerial Compensation, Regulation and Risk in Banks: Theory and Evidence from the Financial Crisis

This paper analyzes the relation between CEOs monetary incentives, financial regulation and risk in banks. We present a model where banks lend to opaque entrepreneurial projects to be monitored by managers; managers are remunerated according to a pay-for-performance scheme and their effort is unobservable to depositors and shareholders. Within a prudential regulatory framework that defines a capital requirement and a deposit insurance, we study the effect of increasing the variable component of managerial compensation on risk taking. We then test empirically how monetary incentives provided to CEOs in 2006 affected banks' stock price and volatility during the 2007-2008 financial crisis on a sample of large banks around the World. The cross-country dimension of our sample allows us to study the interaction between CEO incentives and financial regulation. The empirical analysis suggests that the sensitivity of CEOs equity portfolios to stock prices and volatility has been indeed related to worse performance in countries with explicit deposit insurance and weaker monitoring by shareholders. This evidence is coherent with the main prediction of the model, that is, the variable part of the managerial compensation, combined with weak insiders' monitoring, exacerbates the risk-shifting attitude by managers.

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.

Implicit guarantees, business models and banks’ risk-taking through the crisis: Global and European perspectives

The objectives of this paper are, first, to analyze whether banks’ risk-taking can be explained by factors contributing to implicit guarantees and by factors associated with banks’ business models. Second, it analyzes how risk-taking associated with these factors has changed from a period before the financial crisis (2004–2006), through the crisis (2007–2009), to a period after the crisis (2010–2012). Third, it analyzes whether risk-taking behavior of banks in Europe differs from banks’ risk-taking behavior in the US and globally. The empirical analysis covers 753 banks in a global sample of 45 countries including 86 European banks in 19 countries. 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. The main business model factors capture banks’ reliance on wholesale funding and their involvement in derivatives markets. A comparison of the results of the cross-section analysis for each sub-period shows that the sources of implicit guarantees have become more pervasive in Europe as well as globally after the crisis. Business models are strongly associated with risk during and after the crisis globally. In Europe, banks relying on wholesale funding as well as those with large derivatives positions are relatively risky. Policy implications of these results are discussed.

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.

Deposit Insurance Adoption and Bank Risk-Taking: The Role of Leverage

Explicit deposit insurance is a crucial ingredient of modern financial safety nets. This paper investigates the effect of deposit insurance adoption on individual bank leverage. Using a panel of banks across 117 countries during the period 1986-2011, I show that deposit insurance adoption pushes banks to increase significantly their leverage by reducing their capital buffer. This increase in bank leverage then translates into higher probability of insolvency. Most importantly, I bring evidence that deposit insurance adoption has important competitive effects: I show that large, systemic and highly leveraged banks are unresponsive to deposit insurance adoption.

Deposit insurance and private capital inflows: Further evidence

We use a simple differences-in-differences technique to examine whether adopting explicit deposit insurance impacts on the scale of private capital inflows to developing economies. We present evidence suggesting that these inflows improved more in countries that adopted deposit insurance than in countries that did not adopt it.

Deposit Insurance Coverage, Ownership, and Bank Risk-Taking Behavior: Evidence from Indonesian Commercial Banks

In the first part, this paper aims to examine how explicit deposit insurance coverage affects bank stability using the data from the Indonesian commercial banking industry, which offers a unique setting of natural experiment for this purpose. In the second and third parts, this paper studies how market power and ownership structure affect bank stability. My analysis shows that blanket and full guarantee have adverse impact to the Indonesian bank stability, as well as low explicit coverage, suggesting an inverted U-shaped relation. The analysis then shows that higher degree of market power is significantly associated with lower bank stability, supporting the competition-stability hypothesis. Moreover, the analysis reveals that higher cash flow right is associated with lower bank stability, while central government ownership is associated with higher bank stability, as well as foreign and family ownership. Publicly held banks tend to be lower in overall risk, but have relatively higher allowance for loan losses and lower equity-to-asset ratio compared to private banks. Meanwhile, findings on local government and managerial ownership are mixed. The analysis further shows that bank ownership structure interact with the explicit deposit insurance coverage to influence bank stability.

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.

Interbank deposits and market discipline: Evidence from Central and Eastern Europe

There is a considerable debate on the role played by market discipline in the banking industry. Using data for 207 banks across 10 Central and Eastern European countries, this paper empirically analyzes the disciplining role of interbank deposits. We find that market discipline has been effective in Central and Eastern Europe since the implementation of explicit deposit insurance. However, several factors affect the strength of this discipline. State-owned banks are not disciplined probably because they benefit from implicit insurance. Institutional and legal factors, and resolution strategies adopted by countries during banking crises also impact bank risk and the effectiveness of market discipline. Our results indicate that stronger regulatory discipline reduces risk but also weakens market discipline.

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

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.

Interbank Deposits and Market Discipline: Evidence from Central and Eastern Europe

There is a considerable debate on the role played by market discipline in the banking industry. Using data for 207 banks across 10 Central and Eastern European countries, this paper empirically analyzes the disciplining role of interbank deposits. We find that market discipline has been effective in Central and Eastern Europe since the implementation of explicit deposit insurance. However, several factors affect the strength of this discipline. State-owned banks are not disciplined probably because they benefit from implicit insurance. Institutional and legal factors, and resolution strategies adopted by countries during banking crises also impact bank risk and the effectiveness of market discipline. Our results indicate that stronger regulatory discipline reduces risk but also weakens market discipline.

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.

Sources Of Non-Performing Loans In Turkish Banking System

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">The purpose of this paper is to examine the impact of the unlimited deposit insurance on non-performing loans and market discipline. Deposit insurance program play a crucial role in achieving financial stability. Governments in many advanced and developing economies established deposit insurance schemes for reducing the risk of systemic failure of banks. Deposit insurance has a beneficial effect of reducing the probability of a bank run.<span style="mso-spacerun: yes;">  </span>However deposit insurance systems have its own set of problems. Deposit insurance systems create moral hazard incentives that encourage banks to take excessive risk. Turkey established an explicit deposit insurance system in 1960. Until 1994, the coverage determined by a flat rate but in that date, Turkey experienced a major economic crisis. In April 1994, Turkish government started to apply an unlimited deposit insurance scheme to restore banking system stability. Unlimited deposit insurance caused a remarkable increase at non-performing loans. This paper empirically estimates the impact of unlimited deposit insurance system on non-performing bank loans (NPLs) and analyses the other potential sources of NPLs. </span></p>

Real Deposit Insurance Coverage: An International Study

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Recently several countries have implemented explicit deposit insurance systems. In most countries the adoption of an explicit deposit insurance system followed a banking crisis. This paper examines the impact of demographic, social, and political factors on the presence of an explicit deposit insurance system in a country. Moreover, for a subset of countries with explicit deposit insurance system we try to identify demographic, political, economic, and financial factors that affect the level of deposit insurance coverage. The findings suggest that life expectancy and political rights are related to whether an explicit deposit insurance system is in place or not. For countries with explicit deposit insurance systems the level of income, the importance of the banking sector within the financial system, and the development of domestic banking sector have a significant impact on the level of deposit insurance coverage level. The level of income, deposit money bank assets to GDP ratio, bank overhead costs to total assets ratio, presence of co-insurance, and type of administration are statistically significant in explaining differences in the level of coverage among countries. </span></span></p>

Where to Draw Lines: Stability Versus Efficiency

What kinds of assets should financial intermediaries be permitted to hold? What kinds of liabilities should they be allowed to issue? Should a government or a central bank offer explicit deposit insurance or implicit deposit insurance by acting as a lender of last resort? This paper reviews how tensions involving stability versus efficiency, and regulation versus laissez faire, have for centuries run through macroeconomic analysis of these questions.

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.

The Effect of Deposit Insurance on Market Discipline: Evidence from a Natural Experiment on Deposit Flows

We explore how the introduction of explicit deposit insurance affects deposit flows into and out of banks of varying risk levels. Using evidence from a natural experiment in Russia, we employ a difference-in-difference estimator to isolate the change in the deposit flows of a newly insured group (households) relative to an uninsured “control” group (firms). This approach improves on earlier studies seeking to identify the effect of deposit insurance on market discipline. We find that the relative sensitivity of households to bank capitalization diminished markedly with the introduction of an insurance program covering their deposits. This was not true for firms, however. We then show the finding is not an artifact of the two groups responding differently to a minor banking crisis that arose at roughly the same time.