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Deposit Insurance and Bank Intermediation in the Long Run

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Author Info

  • Robert Cull

    (World Bank - Development Research Group (DECRG))

  • Lemma Senbet

    (University of Maryland - Robert H. Smith School of Business)

  • Marco Sorge

    (World Bank Group - International Finance Corporation)

Abstract

This paper provides empirical evidence on the impact of deposit insurance on the growth of bank intermediation in the long run. We use a unique dataset capturing a variety of deposit insurance features across countries, such as coverage, premium structure, etc. and synthesize available information by means of principal component indices. This paper specifically addresses sample selection and endogeneity concerns by estimating a generalized Tobit model both via maximum likelihood and the Heckman 2-step method. The empirical construct is guided by recent theories of banking regulation that employ an agency framework. The basic moral hazard problem is the incentive for depository institutions to engage in excessively high-risk activities, relative to socially optimal outcomes, in order to increase the option value of their deposit insurance guarantee. The overall empirical evidence is consistent with the likelihood that generous government-funded deposit insurance might have a negative impact on the long-run growth and stability of bank intermediation, except in countries where the rule of law is well established and bank supervisors are granted sufficient discretion and independence from legal reprisals. Insurance premium requirements on member banks, even when risk-adjusted, are instead found to have little effect in restraining banks' risk-taking behavior.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 156.

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Length: 50 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:bis:biswps:156

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Related research

Keywords: Deposit Insurance; Moral Hazard; Bank Regulation and Supervision; Financial Development;

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References

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  1. Gropp, Reint & Vesala, Jukka, 2001. "Deposit insurance and moral hazard: does the counterfactual matter?," Working Paper Series 0047, European Central Bank.
  2. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
  3. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA.
  4. Demirguc-Kunt, Asl' & Kane, Edward J., 2001. "Depositinsurance around the globe : where does it work?," Policy Research Working Paper Series 2679, The World Bank.
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Cited by:
  1. 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.
  2. Camara, Modibo K. & Montes-Negret, Fernando, 2006. "Deposit insurance and banking reform in Russia," Policy Research Working Paper Series 4056, The World Bank.

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