Deposit Insurance Coverage, Credibility of Non-insurance, and Banking Crises
AbstractThe ambiguity in existing empirical work with respect to effects of deposit insurance schemes on banks’ risk-taking can be resolved if it is recognized that absence of deposit insurance is rarely credible and that the credibility of non-insurance can be enhanced by explicit deposit insurance schemes. We show that under reasonable conditions for effects on risk-taking of creditor protection in banking, and for effects on credibility of non-insurance of explicit coverage of deposit insurance schemes, there exists a partial level of coverage that maximizes market discipline and minimizes moral hazard incentives for risk-taking in banking. Using both the occurrence of banking crises and non-performing loans in the banking sector as proxies for excessive risk-taking the results strongly support this hypothesis in industrial and emerging market economies. Policy recommendations on the country level require analyses of institutional factors affecting the credibility of non-insurance. In particular, the implementation of effective distress resolution procedures for banks would allow governments to reduce explicit deposit insurance coverage and, thereby, to strengthen market discipline. JEL Classification: G21; G28; F43 Keywords: Deposit Insurance; Banking Crisis; Insolvency Procedures, Market Discipline
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Bibliographic InfoPaper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2005-10.
Length: 55 pages
Date of creation: 01 Jan 2007
Date of revision:
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Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Phone: +45 3815 3815
Web page: http://www.cbs.dk/departments/finance/
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Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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- Malgorzata Iwanicz-Drozdowska, 2011. "Deposit Insurance Schemes - Lessons from the Crisis for CESEE Banking Systems," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum, SUERF - The European Money and Finance Forum.
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