How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis

Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks, which leads...

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Bibliographic Details
Main Authors:	Anginer, Deniz, Demirguc-Kunt, Asli, Zhu, Min
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	ACCOUNTING ADOPTION OF DEPOSIT INSURANCE ASSET VALUE ASSET VALUES ASSETS RATIO AUSTRIAN NATIONAL BANK BALANCE SHEET BANK ASSETS BANK COMPETITION BANK DEFAULT BANK DEPOSITORS BANK DIRECTORS BANK EQUITY BANK FRAGILITY BANK INTERMEDIATION BANK LENDING BANK PERFORMANCE BANK POLICY BANK REGULATION BANK RESTRUCTURING BANK RISK BANK RISK TAKING BANK RISK-TAKING BANK STABILITY BANK SUPERVISION BANK SYSTEM BANKING ASSETS BANKING CRISES BANKING CRISIS BANKING LAW BANKING SECTOR BANKING SECTOR STABILITY BANKING SECTORS BANKING SYSTEM BANKING SYSTEM STABILITY BANKRUPTCY BANKS BEHAVIOR OF BANKS BENEFITS OF DEPOSIT INSURANCE CALL OPTION CAPITALIZATION CDS COMMERCIAL BANKS CONSEQUENCES OF DEPOSIT INSURANCE CONTAGIOUS BANK CONTAGIOUS BANK RUNS CORPORATE DEBT CORRECTIVE ACTIONS COSTS OF DEPOSIT INSURANCE COUNTRIES WITH DEPOSIT INSURANCE COUNTRIES WITHOUT DEPOSIT INSURANCE CREDIT RISK CREDIT UNION CREDIT UNIONS DEBT DEFAULT PROBABILITIES DEFAULT PROBABILITY DEFAULT RISK DEFAULTS DEPOSIT DEPOSIT INSURANCE DEPOSIT INSURANCE AFFECT DEPOSIT INSURANCE AFFECTS DEPOSIT INSURANCE COVERAGE DEPOSIT INSURANCE DUMMY DEPOSIT INSURANCE INCREASE DEPOSIT INSURANCE INCREASES DEPOSIT INSURANCE PREMIUMS DEPOSIT INSURANCE SCHEME DEPOSIT INSURANCE SCHEMES DEPOSIT INSURANCE VARIABLE DEPOSIT MONEY BANKS DEPOSIT-INSURANCE DEPOSIT-INSURANCE DESIGN DEPOSITOR DEPOSITOR CONFIDENCE DEPOSITORS DEPOSITS DEVELOPING COUNTRIES DIVIDEND DIVIDEND RATE DIVIDENDS DUMMY VARIABLE ECONOMIC CONDITIONS ECONOMIC DEVELOPMENT ECONOMIC DOWNTURNS ECONOMIC STABILITY EFFECT OF DEPOSIT INSURANCE EFFECTIVENESS OF DEPOSIT INSURANCE EFFECTS OF DEPOSIT INSURANCE EFFECTS ON BANK EQUITY PREMIUM EQUITY RETURNS EQUITY VALUE EQUITY VOLATILITY EUROPEAN CENTRAL BANK EXCESSIVE RISK EXCESSIVE RISK TAKING EXPLICIT DEPOSIT EXPLICIT DEPOSIT INSURANCE EXTERNAL AUDITORS FACE VALUE FEATURES OF DEPOSIT INSURANCE FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL INSTABILITY FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL SAFETY NETS FINANCIAL STABILITY FINANCIAL STRUCTURE FINANCIAL STUDIES FINANCIAL SYSTEM FINANCIAL SYSTEMS FRAUD FULL DEPOSIT INSURANCE FULL INSURANCE COVERAGE GLOBAL STOCK MARKET GOVERNMENT INTERVENTIONS GROWTH RATE IMPACT OF DEPOSIT INSURANCE IMPLICIT GUARANTEE IMPLIED VOLATILITY INCENTIVE OF DEPOSITORS INSTITUTIONAL ENVIRONMENT INSTITUTIONAL ENVIRONMENTS INSURANCE DEPOSIT INSURANCE DESIGN INTEREST INCOME INTEREST RATES INTERNATIONAL BANK INTERNATIONAL BANKS INTERNATIONAL FINANCIAL SYSTEM INTERNATIONAL TRADE INTERPOLATION INVESTMENT OPPORTUNITIES INVESTOR CONFIDENCE LACK OF MARKET DISCIPLINE LEVEL OF RISK LEVERAGE LEVERAGE RATIO LEVERAGE RATIOS LIQUIDITY LOAN LOAN LOSS PROVISIONS MARKET CAP MARKET DISCIPLINE MARKET EQUITY MARKET INFORMATION MARKET PRICES MARKET VALUE MONETARY FUND MORAL HAZARD MORAL HAZARD EFFECT MORAL HAZARD EFFECTS MORAL HAZARD PROBLEM MORAL HAZARD PROBLEMS NEGATIVE SHOCK OPTIMAL DEPOSIT INSURANCE OWNERSHIP RIGHTS PARTICULAR COUNTRY PORTFOLIO PORTFOLIO OF BANKS PRESENCE OF DEPOSIT INSURANCE PRIVATE BANKS PRIVATE CREDIT PRIVATE CREDITS PRIVATE SECTOR DEVELOPMENT PROBABILITY OF DEFAULT PROBLEM BANK PROFITABILITY PUBLIC POLICY RECAPITALIZATIONS REORGANIZATION RESERVE RETURN ON ASSETS RISK ASSESSMENT RISK SHIFTING RISK TAKING SAFETY NET SHAREHOLDER SHAREHOLDERS STOCK MARKET STOCK MARKET CAPITALIZATION STOCK PRICE STOCK RETURN STOCK RETURNS SUPERVISORY AGENCY SUPERVISORY AUTHORITIES SUPERVISORY AUTHORITY SYSTEMIC CRISIS SYSTEMIC RISK T-BILL T-BILL RATE TREASURY TREASURY YIELD TRUST COMPANIES UNSOPHISTICATED DEPOSITORS VALUE OF ASSETS VALUE OF BANK ASSETS WEAK BANK
Online Access:	http://documents.worldbank.org/curated/en/2012/12/17061254/deposit-insurance-affect-bank-risk-evidence-recent-crisis http://hdl.handle.net/10986/12186

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Summary:	Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks, which leads to excessive risk-taking. This paper examines the relation between deposit insurance and bank risk and systemic fragility in the years leading to and during the recent financial crisis. It finds that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. The findings suggest that the "moral hazard effect" of deposit insurance dominates in good times while the "stabilization effect" of deposit insurance dominates in turbulent times. Nevertheless, the overall effect of deposit insurance over the full sample remains negative since the destabilizing effect during normal times is greater in magnitude compared with the stabilizing effect during global turbulence. In addition, the analysis finds that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.

How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis

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