Blanket guarantee, deposit insurance, and risk-shifting incentive: evidence from Indonesia
AbstractIndonesia established a deposit insurance system to maintain stability in its banking sector after the abolishment of blanket guarantees in 2005. Since the insurance premiums are fixed and flat, deposit insurance may create an incentive for banks to take more risks and transfer the risks to the deposit insurer. Using an option pricing based model of deposit insurance, we compute the fair deposit insurance premiums for all banks listed on the Indonesian stock exchange. We find evidence that banks shifted their risks to the deposit insurer. The magnitude of risk-shifting incentives under the deposit insurance regime is higher than under the blanket guarantee regime, as Indonesian depositors seem to lack awareness in monitoring bank performance.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 35557.
Date of creation: 23 Dec 2011
Date of revision:
Deposit Insurance; Fair Premium; Option-based Pricing; Moral Hazard; Indonesia;
Find related papers by JEL classification:
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-03 (All new papers)
- NEP-DEV-2012-01-03 (Development)
- NEP-IAS-2012-01-03 (Insurance Economics)
- NEP-SEA-2012-01-03 (South East Asia)
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