Implicit Deposit Insurance Research Articles

Неявное страхование вкладов в России после пандемии

Implicit deposit insurance is the name given to the cases when citizens prefer allocating deposits within banks with state (government) ownership when the deposit amount exceeds the limit covered by the state deposit insurance system. Implicit deposit insurance has already gained the focus of research attention in Russia, but during the times of pandemics and limited to deposits for the region of Moscow. The current study uses more up-to-date data of 2023-24 and extends the regional coverage to 25 regions of Russia. We evidence that the earlier found U-shaped dependence of the deposit rate premium and the state bank size was inverted. Moreover, we argue that during the times of rising key rate the heterogeneity of implicit deposit insurance premium though present became more homogeneous in terms of sign of the premium than during the times of relatively low-key rate.

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.

Premium for implicit deposit insurance within Russian state banks

Deposit insurance system (DIS) exists for 17 years in Russia. The major deposit market share belongs to state banks. Ordinary depositors may perceive the status of the bank state ownership to reflect additional deposit safety, even in the excess of the DIS limits. Such a situation is called an “implicit deposit insurance” in the literature. By offering a sort of implicit deposit insurance services state banks might underprice the deposits in excess of DIS limits compared to the private banks. We utilize data from the open sources to measure the scale of the implicit deposit insurance pricing in Russian state banks. We have revealed that Russian state banks pay extra premium all other things being equal. More specifically, the premium is larger in the smallest and the largest state banks, than in the medium-sized ones. Thus, we claim that the implicit insurance premium has a U-shaped form for Russian state banks depending on their asset size. However, Russian state banks underprice all deposits all other things being equal. Additionally, we find out that IRB banks in Russia are more prone to set up higher deposit rates when they take on more risks, than non-IRB banks.

The Payouts Choice for Deposit Insurance System

Entropy balancing is introduced to assess the deposit insurance design characteristics in this paper. Applying an extensive duration data including 141 countries from 1960 to 2015, the authors employ the entropy balancing method to simulate the data structure under the implicit deposit insurance system. Then the paper adopts an endogenous treatment effects model and a Heckman two-step selection model to examine payouts choice of the deposit insurance. It is found that entropy balancing can calibrate unit weights and reweight treatment and control groups by a maximum entropy scheme. Thus, a possibly given conditions will be satisfied and information concerning sample moments will be integrated. The results show clearly that different payouts choice and the corresponding coverage setting can effectively reduce the moral hazards that may result from the introduction of a deposit insurance scheme. When the Payouts is Per Depositor Account or Per Depositor, the banks’ moral hazard is higher. However, the payment method of Per Depositor Per Institution can effectively restrain the banks’ risk-taking activities.

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.

Does a Higher Level of Capital Ensure Lower Risk for a Bank? Evidence from the Vietnamese Banking System

The relationship between bank capital and risk is one of the conventional and highly debatable issues in banking literature. In the context of this paper, we apply the two-step generalized method of moments (GMM) technique for dynamic panels for the Vietnamese banking sector over the 1999-2014 period to investigate how risk is sensitive to capital regulations. As controlling both bank-specific characteristics and macroeconomic variables, we found a negative relationship between capital and risk which is proxied by two alternative Z-score measurements. Our findings not only support the moral hazard hypothesis where banks have incentives to exploit explicit and implicit deposit insurance schemes but also reveal the first direct beneficiaries from the regulations following Basel I standards in Vietnam that domestic banks with a higher capital level are more likely to avoid default and risk. However, increasing capital and improving operations management should be complementary criteria to ensure financial system safety.

Bad luck, Bad policy or Bad banking? Understanding the financial management behavior of MENA banks

The importance of management behaviour for MENA country banks has gained significant importance, especially in the wake of the financial crisis. To address this issue, we exploit bank-level data across MENA countries for an extended time period and examine the different facets of management behaviur. The analysis provides evidence in favor of bad luck hypothesis that is equally applicable to both conventional and Islamic banks. Relatedly, we also find that the moral hazard hypothesis and the gamble for resurrection hypothesis to be relevant, although the relative importance of the management behavior differs across bank ownership. Further disaggregation by country categorizations shows that this behavior varies between oil exporters and oil importers as also between countries with explicit and implicit deposit insurance.

Effects of Deposit Insurance on Self-Discipline of Bank Franchise Value

Foreign research has shown that the bank franchise value is the important mechanism of the bank’s risk self-discipline. However, the relationship between the franchise value and the risk behavior of our bank must be based on our special financial background. Before the implementation of explicit deposit insurance system in China, there has been an implicit deposit insurance system guaranteed by the government. The traditional literature suggests that the implicit deposit insurance system provides a strong guarantee for commercial banks, which may weaken the risk discipline effect of the bank’s franchise value, and the reasonable explicit deposit insurance system is superior to the implicit deposit insurance system. In the financial context of the explicit deposit insurance system, the self-discipline effect of the franchise value will be repaired. Based on the reality of establishing an explicit deposit insurance system in China, this paper uses the Tobin Q value to measure the franchise value of 16 listed banks in China. The relationship between the franchise value and risk of bank before and after the introduction of explicit deposit insurance is studied by using panel data model. The results show that before the implementation of the explicit deposit insurance system, the self-discipline effect of the franchise value is completely ineffective in the context of the government-guaranteed implicit deposit insurance system. The cross-item coefficient of the explicit deposit insurance system and the franchise value is significantly negative. It shows that the implementation of the explicit deposit insurance system has played a role in restoring the self-discipline effect of the bank’s franchise value.

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.

Industry Environment, Bank Risk-Taking and Deposit Insurance

Classic theories always ignore the influence of the banking industry environment on deposit insurance’s regulation mechanism. With information transparency and competition degree dimensions, we build a banking risk-taking model and find that the optimal regulation mechanism does not depend on the advantage of the scheme oneself, but it is a trade-off of bank’s risk incentive which involves the banking industry environment. Under the suitable competition degree, fair-priced explicit deposit insurance is optimal when the information transparency is high. Otherwise implicit deposit insurance is optimal; moreover if the competition is fierce, then deposit insurance’s regulation fails. We find that in the regulation feasible region, the improvement of industry environment will correct moral hazard; however in the regulation failure region, we perfect the exit mechanism of the bank which is in trouble by giving the disposal cost pricing strategy. And the most important is that this regulation mechanism demonstrates the endogenous cause of the exist of China’s implicit guarantee system featured by strict administrative control. Based on our research we think that if we do well with the delegating power and strengthening regulation, improve the industry environment, and the collaboration with different policies then we will reform the regulation system successfully and improve the society’s economic efficiency.

Information Disclosure and Bank Risk‐Taking under a Partially Implicit Deposit Insurance System: Evidence from China

AbstractThis article examines the role of information disclosure on bank risk‐taking behaviour in China. The study uses a game theory model to analyse the interaction mechanism between bank risk‐taking behaviour and its information disclosure under China's partially implicit deposit insurance system. It is found that banks that are more likely to receive a government bailout when they are in trouble tend to take excessive risk. In addition, the implicit guarantee weakens the market‐monitoring effect of information disclosure. Using data from 60 commercial banks in China, we find strong empirical support for our findings.

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.

Economic rehabilitation programme and the existence of implicit deposit insurance in North Cyprus

PurposeThe purpose of this paper is to investigate the role of implicit deposit insurance in North Cyprus Banking Sector during the period 1984‐2002.Design/methodology/approachA multivariate logit model is an empirical methodology that identifies the probability of bank failure. The model links the probability of banking problems to a set of bank‐specific factors, macro‐environment and structural weaknesses that may have exacerbated the internal troubles of the financial institutions.FindingsThe empirical findings suggest that in addition to the microeconomic variables, high credit expansion to private sector, implicit deposit insurance, existence of economic rehabilitation programmed, financial liberalization, weak regulation and supervision played an important role in the escalation of the 2000‐2002 banking distress in North Cyprus.Research limitations/implicationsFor further research, this paper may extend the time period and include other macroeconomic variables such as inflation, exchange pressure that may have a direct effect on bank failure in North Cyprus.Practical implicationsThis paper presents a practical application of the deposit insurance policy as a main determinant of bank failure, which would help bank examiners, investors and regulators in their decisions to alert management in time, to prevent bank failure. The ability for early detection of any structural or financial weaknesses in the country will help to minimize financial costs of the island that brought about by financial instability.Originality/valueOverall, the empirical results that are obtained by logit model analysis are quite robust. The logit regression results reveal that the predicted values, i.e. the potential risk levels for Mediterranean Bank was very high in this analysis. Towards 2005 Mediterranean Bank had to close, which prove that the model is robust.

Inflation Control and Banking Systems: The Case of Tunisia

Tunisia is a developing country with embryonic bank regulations. Moving to a full-fledged inflation-control monetary policy requires market-determined interest rates and withdrawing the policy of implicit deposit insurance. This shift might destabilize economic activity. This need not be the case. Tunisia does not have institutions for appropriate banking regulations and transparent monetary policy, but it has some well-performing banks. Using panel data on Tunisian and Turkish banks, I show that banks with low profit rates have poorer management. Thus, the creation of appropriate institutions and laws would force delinquent banks to improve their governance.

Is there any effect of market discipline on China’s bank supervision?

This study finds that implicit deposit insurance in the four original state banks, undermines market discipline and creates moral hazard. The differences of degree in market discipline in different banks depending on their ownership structure result from varying coverage by implicit deposit insurance. Chinese bank supervisory authorities should reform polices to enhance market discipline.

Australia's Implicit Deposit Insurance — Should It Be Reconsidered?

Most major developed countries have bank deposit insurance; the European Parliament recently mandated it for all member countries. One of the characteristics of most deposit insurance schemes to protect depositors is that the banking industry funds the scheme through assessments. Interestingly, Australia does not have explicit deposit insurance and to date there has been little public debate on this subject. This paper proposes that such a debate should be initiated.

Implicit deposit insurance and deposit guarantees: Characteristics of Australian bank risk premia

This paper examines the hypothesis that CD issue yields of Australian banks incorporate a premium that reflects bank risk. Our empirical analysis of Australian banks’ CD premiums suggests the data is consistent with this hypothesis and hence supports the view that CD holders do not perceive their deposits as being risk‐free. Nor do we find any statistically significant difference between the premiums paid by private banks with implicit deposit insurance vis‐a‐vis those paid by government‐owned banks with explicit government guarantees.

Is deposit insurance inevitable? Lessons from Argentina

This paper explores the decision by the Argentine government to abolish deposit insurance, and its subsequent decision to re-establish a form of deposit insurance. Before 1991, the Argentine banking system operated under a regime of optional, explicit deposit insurance, coupled with extensive implicit deposit insurance in the form of central bank assistance to failing banks. In 1991 and 1992, Argentina reversed this policy by repealing the country's deposit insurance program and attempting to convince financial markets that it would not under any circumstances rescue a failing bank. In 1995, in the face of a forthcoming election and a severe economic crisis sparked by the Mexicon peso devaluation of December 1994, the Argentine government reinstituted a form of deposit insurance in an effort to stave off an all out bank panic. The decision to re-establish deposit insurance appears inconsistent with repeated assurances from high-level officials that the Argentine government would not under any circumstances bail out depositors in a failing bank. These events are of interest to U.S. deposit insurance reform because they allow the investigation of a real-world case in which a significant economic system repealed its program of deposit insurance. It is often said in the United States that cutbacks in the deposit insurance guarantee are politically impossible. Yet such reforms were implemented in Argentina. How those reforms came to pass is a question of some interest for the analysis of U.S. deposit insurance reform. At the same time, the government's subsequent retreat from its commitment to allow troubled banks to fail, without protecting depositors, counsels caution about the efficacy of attempts to eliminate deposit insurance. Argentina's deposit insurance reform could not withstand the political and economic pressures attending a severe crisis that threatened the viability of the overall package of economic change. To what extent can any country reliably commit not to protect bank depositors, given the possibility of a banking crisis and the extraordinary political pressures that attend it? While fundamental reform of deposit insurance does appear possible, the experience in Argentina suggests caution about the durability of such reforms, especially in economic systems characterized by historical instability in banking markets.

Stability in the Absence of Deposit Insurance: The Canadian Banking System, 1890-1966

The Canadian banking system experienced a prolonged period of stability prior to the introduction of deposit insurance in 1967. Documenting the reasons for this stability provides important evidence in the debate over the impact of mandatory flat-rate deposit insurance. In this paper we use new archival data to refute recent claims that this stability resulted from an implicit deposit insurance scheme managed by Canada's largest banks and guaranteed by the federal government. We argue that the Canadian banking system was stable for two reasons. First, the absence of deposit insurance provided incentives for both prudence on the part of management, and monitoring by depositors and regulators. Second, the absence of unit banking and other regulatory barriers to competition facilitated efficient mergers which produced a relatively small number of well-managed banks. Copyright 1995 by Ohio State University Press.

The Fiscal Abuse of Central Banks

This paper reviews the fiscal activities that governments in a sample of 26 developing countries have obliged their central banks to undertake. In the main, these activities fall under five categories: (1) collecting seigniorage; (2) imposing financial restriction; (3) implementing selective credit policies; (4) undertaking foreign exchange operations at nonmarket-clearing prices; and (5) providing implicit or explicit deposit insurance at subsidized rates and recapitalizing insolvent financial institutions. Not all central banks engage in all these activities, but some central banks perform additional fiscal activities such as collecting taxes and running food procurement programs.