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Wealth and Risk Effects of Adopting Deposit Insurance in Canada: Evidence of Risk Shifting by Banks and Trust Companies

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  • JOHN D. WAGSTER
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    Abstract

    This paper confirms that adopting explicit deposit insurance expanded risk-shifting incentives for Canadian Banks and Trust Companies. By transferring responsibility for monitoring non-systematic risk to the Canadian Deposit Insurance Corporation (CDIC), deposit insurance eliminated the compensation previously paid to large-block stockholder monitors. This transfer fueled a redistribution of insured-institution stock from poorly diversified large-block shareholders to diversified investors. Also, subsequent changes in market volatility support the hypothesis that CDIC insurance and the absorption of catastrophic risk it provided reduced systematic risk in the stock market as a whole even as it increased non-systematic risk in the banking and trust-company sector. Copyright 2007 The Ohio State University.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2007.00082.x
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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 39 (2007)
    Issue (Month): 7 (October)
    Pages: 1651-1681

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    Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:7:p:1651-1681

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Finn Poschmann, 2014. "Shareholder Liability: A New (Old) Way of Thinking about Financial Regulation," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 401, February.
    2. Kariastanto, Bayu, 2011. "Blanket guarantee, deposit insurance, and risk-shifting incentive: evidence from Indonesia," MPRA Paper 35557, University Library of Munich, Germany.
    3. 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.

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