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Deposit insurance and bank risk-taking: Evidence from internal loan ratings

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  • Ioannidou, Vasso P.
  • Penas, María Fabiana

Abstract

We analyze the effect of deposit insurance on the risk-taking behavior of banks in the context of a quasi-natural experiment using detailed credit registry data. Using the case of an emerging economy, Bolivia, which introduced a deposit insurance system during the sample period, we compare the risk-taking behavior of banks before and after the introduction of this system. We find that in the post-deposit insurance period, banks are more likely to initiate riskier loans (i.e., loans with worse internal ratings at origination). These loans carry higher interest rates and are associated with worse ex-post performance (i.e., they have higher default and delinquency rates). Banks do not seem to compensate for the extra risk by increasing collateral requirements or decreasing loan maturities. We also find evidence that the increase in risk-taking is due to the decrease in market discipline from large depositors. Finally, differences between large (too-big-to-fail) and small banks diminished in the post-deposit insurance period.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 19 (2010)
Issue (Month): 1 (January)
Pages: 95-115

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Handle: RePEc:eee:jfinin:v:19:y:2010:i:1:p:95-115

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Web page: http://www.elsevier.com/locate/inca/622875

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References

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Citations

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Cited by:
  1. Raquel de F. Oliveira & Rafael F. Schiozer & Lucas A. B. de C. Barros, 2011. "Too Big to Fail Perception by Depositors: an empirical investigation," Working Papers Series 233, Central Bank of Brazil, Research Department.
  2. Hasan, Iftekhar & Jackowicz, Krzysztof & Kowalewski, Oskar & Kozłowski, Łukasz, 2012. "Market Discipline during Crisis: Evidence from Bank Depositors in Transition Countries," MPRA Paper 43693, University Library of Munich, Germany.
  3. Pilar Gómez-Fernández-Aguado & Antonio Partal-Ureña & Antonio Trujillo-Ponce, 2013. "Evaluating the effects of the EU directive proposal for risk-based deposit insurance premiums in Spain," Working Papers 13.01, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
  4. Beck, T.H.L. & Munzele Maimbo, S. & Faye, I. & Triki, T., 2011. "Financing Africa: Through the crisis and beyond," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4758568, Tilburg University.
  5. Koen Rossel-Cambier, 2012. "Can Combined Microfinance Boost Economic Results? An Empirical Cross-sectional Analysis," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 79-94, August.
  6. Franklin Allen & Elena Carletti & Agnese Leonello, 2011. "Deposit insurance and risk taking," Oxford Review of Economic Policy, Oxford University Press, vol. 27(3), pages 464-478.
  7. Diana Bonfim & Moshe Kim, 2012. "Liquidity risk in banking: is there herding?," Working Papers w201218, Banco de Portugal, Economics and Research Department.
  8. Westman, Hanna, 2011. "The impact of management and board ownership on profitability in banks with different strategies," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3300-3318.
  9. Luis Brandao-Marques & Ricardo Correa & Horacio Sapriza, 2013. "International evidence on government support and risk taking in the banking sector," International Finance Discussion Papers 1086, Board of Governors of the Federal Reserve System (U.S.).
  10. Jokivuolle, Esa & Keppo, Jussi, 2014. "Bankers' compensation: Sprint swimming in short bonus pools?," Research Discussion Papers 2/2014, Bank of Finland.
  11. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2012. "How does deposit insurance affect bank risk ? evidence from the recent crisis," Policy Research Working Paper Series 6289, The World Bank.
  12. Brahim Guizani & Wako Watanabe, 2010. "The Deposit Insurance and the Risk-Shifting Incentive Evidence from the Blanket Deposit Insurance in Japan," Keio/Kyoto Joint Global COE Discussion Paper Series 2010-004, Keio/Kyoto Joint Global COE Program.
  13. Koen Rossel-Cambier, 2011. "Is Combined Microfinance an Instrument to enhance Sustainable Pro-Poor Public Policy Outcomes?," Working Papers CEB 11-013, ULB -- Universite Libre de Bruxelles.
  14. Kneer, E.C., 2013. "Essays on the size of the financial aector, financial liberalization and growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5930486, Tilburg University.

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