Publication: How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis
Date
2012-12
ISSN
Published
2012-12
Author(s)
Abstract
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.
Citation
“Anginer, Deniz; Demirguc-Kunt, Asli; Zhu, Min. 2012. How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis. Policy Research Working Paper; No. 6289. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/99249141-1f82-5d44-ab58-765ab9811665 License: CC BY 3.0 IGO.”
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