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Capital Adequacy, Deposit Insurance, and the Effect of Their Interaction on Bank Risk

Author

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  • Seksak Jumreornvong

    (Department of Finance, Thammasat Business School, Thammasat University, Bangkok 10200, Thailand)

  • Chanakarn Chakreyavanich

    (Kasikorn Bank, Bangkok 10200, Thailand)

  • Sirimon Treepongkaruna

    (Accounting and Finance, Business School, University of Western Australia, Perth, WA 6009, Australia)

  • Pornsit Jiraporn

    (Great Valley School of Graduate Professional Studies, Pennsylvania State University, Malvern, PA 19355, USA)

Abstract

This paper investigates how deposit insurance and capital adequacy affect bank risk for five developed and nine emerging markets over the period of 1992–2015. Although full coverage of deposit insurance induces moral hazard by banks, deposit insurance is still an effective tool, especially during the time of crisis. On the contrary, capital adequacy by itself does not effectively perform the monitoring role and leads to the asset substitution problem. Implementing the safety nets of both deposit insurance and capital adequacy together could be a sustainable financial architecture. Immediate-effect analysis reveals that the interplay between deposit insurance and capital adequacy is indispensable for banking system stability.

Suggested Citation

  • Seksak Jumreornvong & Chanakarn Chakreyavanich & Sirimon Treepongkaruna & Pornsit Jiraporn, 2018. "Capital Adequacy, Deposit Insurance, and the Effect of Their Interaction on Bank Risk," JRFM, MDPI, vol. 11(4), pages 1-18, November.
    • Handle: RePEc:gam:jjrfmx:v:11:y:2018:i:4:p:79-:d:183833
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