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 lead to excessive risk-taking. We examine the relation bet...

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Main Authors:	Anginer, Deniz, Demirguc-Kunt, Asli, Zhu, Min
Format:	Journal Article
Language:	en_US
Published:	Elsevier 2013
Subjects:	bank risk systemic risk deposit insurance bank supervision and regulation financial crisis
Online Access:	http://hdl.handle.net/10986/16210

id	okr-10986-16210
recordtype	oai_dc
spelling	okr-10986-162102021-04-23T14:03:28Z How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis Anginer, Deniz Demirguc-Kunt, Asli Zhu, Min bank risk systemic risk deposit insurance bank supervision and regulation financial 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 lead to excessive risk-taking. We examine the relation between deposit insurance and bank risk and systemic fragility in the years leading up to and during the recent financial crisis. We find 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. Our 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. The overall effect of deposit insurance over the full sample we study remains negative since the destabilizing effect during normal times is greater in magnitude compared to the stabilizing effect during global turbulence. In addition, we find 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. 2013-11-04T19:38:01Z 2013-11-04T19:38:01Z 2013-10-07 Journal Article Journal of Banking and Finance 0378-4266 http://hdl.handle.net/10986/16210 en_US CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ World Bank Elsevier Publications & Research :: Journal Article Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	en_US
topic	bank risk systemic risk deposit insurance bank supervision and regulation financial crisis
spellingShingle	bank risk systemic risk deposit insurance bank supervision and regulation financial crisis Anginer, Deniz Demirguc-Kunt, Asli Zhu, Min How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis
description	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 lead to excessive risk-taking. We examine the relation between deposit insurance and bank risk and systemic fragility in the years leading up to and during the recent financial crisis. We find 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. Our 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. The overall effect of deposit insurance over the full sample we study remains negative since the destabilizing effect during normal times is greater in magnitude compared to the stabilizing effect during global turbulence. In addition, we find 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.
format	Journal Article
author	Anginer, Deniz Demirguc-Kunt, Asli Zhu, Min
author_facet	Anginer, Deniz Demirguc-Kunt, Asli Zhu, Min
author_sort	Anginer, Deniz
title	How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis
title_short	How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis
title_full	How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis
title_fullStr	How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis
title_full_unstemmed	How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis
title_sort	how does deposit insurance affect bank risk? evidence from the recent crisis
publisher	Elsevier
publishDate	2013
url	http://hdl.handle.net/10986/16210
_version_	1764432514177302528

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

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