IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v96y2018icp268-276.html

Deposit insurance, bank exit, and spillover effects

Author

Listed:
  • Ji, Yang
  • Bian, Wenlong
  • Huang, Yiping

Abstract

This study resolves a puzzle in the banking literature: why do an increasing number of countries adopt a deposit insurance scheme (DIS) while prior studies have shown that it increases the likelihood of banking crises? Using a dataset of 64 countries over the period 1970–2009, our study shows that the adoption of a DIS is associated with a 2.0–4.7 percentage points higher likelihood of banking crises (the “direct effect”), while it is associated with a 10.1–11.1 percentage points lower likelihood of non-banking financial crises (the “spillover effect”). Since the “spillover effect” is larger than the “direct effect”, a DIS actually increases overall financial stability. Additionally, we analyze the mechanisms through which a DIS affects financial crises. First, we highlight the existence of the implicit guarantee and examine its interaction with an explicit DIS. Second, we investigate the substitution effect between banking crises and non-banking crises.

Suggested Citation

  • Ji, Yang & Bian, Wenlong & Huang, Yiping, 2018. "Deposit insurance, bank exit, and spillover effects," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 268-276.
    • Handle: RePEc:eee:jbfina:v:96:y:2018:i:c:p:268-276
    DOI: 10.1016/j.jbankfin.2018.09.013
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426618302000
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2018.09.013?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Talley, Samuel H. & Mas, Ignacio, 1990. "Deposit insurance in developing countries," Policy Research Working Paper Series 548, The World Bank.
    2. Beck, Thorsten & Poelhekke, Steven, 2023. "Follow the money: Does the financial sector intermediate natural resource windfalls?," Journal of International Money and Finance, Elsevier, vol. 130(C).
    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. Angrist, Joshua D, 1990. "Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative Records: Errata," American Economic Review, American Economic Association, vol. 80(5), pages 1284-1286, December.
    5. Angkinand, Apanard P., 2009. "Banking regulation and the output cost of banking crises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 240-257, April.
    6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    8. Sebastian Schich, 2008. "Financial turbulence: Some lessons regarding deposit insurance," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2008(1), pages 55-79.
    9. Asli Demirgüç-Kunt & Edward J. Kane & Luc Laeven, 2014. "Deposit Insurance Database," NBER Working Papers 20278, National Bureau of Economic Research, Inc.
    10. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
    11. Anichul Khan & Hasnat Dewan, 2011. "Deposit insurance scheme and banking crises: a special focus on less-developed countries," Empirical Economics, Springer, vol. 41(1), pages 155-182, August.
    12. Mr. Alexander Y Kyei, 1995. "Deposit Protection Arrangements: A Survey," IMF Working Papers 1995/134, International Monetary Fund.
    13. Hutchison, Michael & McDill, Kathleen, 1999. "Are All Banking Crises Alike? The Japanese Experience in International Comparison," Journal of the Japanese and International Economies, Elsevier, vol. 13(3), pages 155-180, September.
    14. Rafael Di Tella & Ernesto Schargrodsky, 2004. "Do Police Reduce Crime? Estimates Using the Allocation of Police Forces After a Terrorist Attack," American Economic Review, American Economic Association, vol. 94(1), pages 115-133, March.
    15. Cull, Robert & Senbet, Lemma W & Sorge, Marco, 2005. "Deposit Insurance and Financial Development," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(1), pages 43-82, February.
    16. Mr. Ilan Goldfajn & Mr. Rodrigo O. Valdes, 1997. "Capital Flows and the Twin Crises: The Role of Liquidity," IMF Working Papers 1997/087, International Monetary Fund.
    17. repec:rnp:ecopol:09111 is not listed on IDEAS
    18. Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992. "Is Fairly Priced Deposit Insurance Possible?," Journal of Finance, American Finance Association, vol. 47(1), pages 227-245, March.
    19. Abdul Abiad & Enrica Detragiache & Thierry Tressel, 2010. "A New Database of Financial Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 57(2), pages 281-302, June.
    20. Laeven, Luc, 2002. "International evidence on the value of deposit insurance," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(4), pages 721-732.
    21. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome"," NBER Chapters, in: Financial Deregulation and Integration in East Asia, pages 7-50, National Bureau of Economic Research, Inc.
    22. Angkinand, Apanard & Wihlborg, Clas, 2010. "Deposit insurance coverage, ownership, and banks' risk-taking in emerging markets," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 252-274, March.
    23. Thorsten Beck & Steven Poelhekke, 2017. "Follow the money: Does the Financial Sector Intermediate Natural Resource Windfalls?," Tinbergen Institute Discussion Papers 17-027/VIII, Tinbergen Institute.
    24. Bergbrant, Mikael C. & Campbell, Kaysia T. & Hunter, Delroy M. & Owers, James E., 2016. "Does deposit insurance retard the development of non-bank financial markets?," Journal of Banking & Finance, Elsevier, vol. 66(C), pages 102-125.
    25. Alston Lee J. & Grove Wayne A. & Wheelock David C., 1994. "Why Do Banks Fail? Evidence from the 1920s," Explorations in Economic History, Elsevier, vol. 31(4), pages 409-431, October.
    26. Luc Laeven & Fabian Valencia, 2020. "Systemic Banking Crises Database II," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(2), pages 307-361, June.
    27. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    28. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(2), pages 283-295, June.
    29. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-272, January.
    30. Zigrand, Jean-Pierre, 2014. "Systems and systemic risk in finance and economics," LSE Research Online Documents on Economics 61220, London School of Economics and Political Science, LSE Library.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Koetter, Michael & Nguyen, Huyen, 2023. "European banking in transformational times: Regulation, crises, and challenges," IWH Studies 7/2023, Halle Institute for Economic Research (IWH).
    2. Delis, Manthos D. & Iosifidi, Maria & Papadopoulos, Panagiotis, 2022. "Blessing or curse? Government funding of deposit insurance and corporate lending," Journal of Financial Stability, Elsevier, vol. 61(C).
    3. Chen, Wang & Zhang, Zhiwen & Hamori, Shigeyuki & Kinkyo, Takuji, 2021. "Not all bank systemic risks are alike: Deposit insurance and bank risk revisited," International Review of Financial Analysis, Elsevier, vol. 77(C).
    4. Noman, Abu Hanifa Md. & Hassan, M. Kabir & Pervin, Sajeda & Isa, Che Ruhana & Sok-gee, Chan, 2022. "The mediating role of competition on deposit insurance and the risk-taking of banks in ASEAN countries," Research in International Business and Finance, Elsevier, vol. 59(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anichul Khan & Hasnat Dewan, 2011. "Deposit insurance scheme and banking crises: a special focus on less-developed countries," Empirical Economics, Springer, vol. 41(1), pages 155-182, August.
    2. Chen, Wang & Zhang, Zhiwen & Hamori, Shigeyuki & Kinkyo, Takuji, 2021. "Not all bank systemic risks are alike: Deposit insurance and bank risk revisited," International Review of Financial Analysis, Elsevier, vol. 77(C).
    3. Caballero, Julián, 2012. "Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises?: Cross-Country Evidence on Bonanzas in Capital Inflows and Bonanza-Boom-Bust Cycles," IDB Publications (Working Papers) 3971, Inter-American Development Bank.
    4. Fendel Ralf & Stremmel Hanno, 2016. "Characteristics of Banking Crises: A Comparative Study with Geographical Contagion," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 236(3), pages 349-388, May.
    5. Asli Demirguc-Kunt & Edward J. Kane, 2002. "Deposit Insurance Around the Globe: Where Does It Work?," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 175-195, Spring.
    6. Gary B. Gorton, 2019. "The Regulation of Private Money," NBER Working Papers 25891, National Bureau of Economic Research, Inc.
    7. Robert Dekle & Kenneth Kletzer, 2002. "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 507-558, National Bureau of Economic Research, Inc.
    8. Gary Gorton, 2020. "The Regulation of Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S1), pages 21-42, October.
    9. Delis, Manthos D. & Iosifidi, Maria & Papadopoulos, Panagiotis, 2022. "Blessing or curse? Government funding of deposit insurance and corporate lending," Journal of Financial Stability, Elsevier, vol. 61(C).
    10. Bernard Bollen & Michael Skully & David Tripe & Xiaoting Wei, 2015. "The Global Financial Crisis and Its Impact on Australian Bank Risk," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 89-111, March.
    11. Delis, Manthos & Iosifidi, Maria & Papadopoulos, Panagiotis, 2020. "Blessing or curse? Government funding of deposit insurance and corporate lending," MPRA Paper 99153, University Library of Munich, Germany.
    12. Boyd, John H. & De Nicolò, Gianni & Rodionova, Tatiana, 2019. "Banking crises and crisis dating: Disentangling shocks and policy responses," Journal of Financial Stability, Elsevier, vol. 41(C), pages 45-54.
    13. Michael Wosser, 2015. "The Determinants of Systemic Banking Crises A Regulatory Perspective," Economics Department Working Paper Series n265-15.pdf, Department of Economics, National University of Ireland - Maynooth.
    14. Thanh C. Nguyen & Vítor Castro & Justine Wood, 2022. "Political environment and financial crises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 417-438, January.
    15. Menzie D. Chinn & Kenneth M. Kletzer, 1999. "International capital inflows, domestic financial intermediation and financial crises under imperfect information," Proceedings, Federal Reserve Bank of San Francisco, issue sep.
    16. Tanna, Sailesh & Luo, Yun & De Vita, Glauco, 2017. "What is the net effect of financial liberalization on bank productivity? A decomposition analysis of bank total factor productivity growth," Journal of Financial Stability, Elsevier, vol. 30(C), pages 67-78.
    17. Essid, Zina & Boujelbene, Younes & Plihon, Dominique, 2014. "Institutional quality and bank instability: cross-countries evidence in emerging countries," MPRA Paper 56251, University Library of Munich, Germany.
    18. Guérineau, Samuel & Léon, Florian, 2019. "Information sharing, credit booms and financial stability: Do developing economies differ from advanced countries?," Journal of Financial Stability, Elsevier, vol. 40(C), pages 64-76.
    19. Menzie D. Chinn & Kenneth M. Kletzer, 2000. "International Capital Inflows, Domestic Financial Intermediation and Financial Crises under Imperfect Information," NBER Working Papers 7902, National Bureau of Economic Research, Inc.
    20. Reuven Glick & Michael M. Hutchison, "undated". "Banking and Currency Crises: How Common Are Twins?," EPRU Working Paper Series 99-20, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:96:y:2018:i:c:p:268-276. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.