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How do financial inclusion, deposit insurance, and bank concentration affect bank stability?

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Listed:
  • Xiangyuan Yu
  • Yiming Chang
  • Jiaqi Li

Abstract

This study investigates the nonlinear interplay between bank stability, financial inclusion, deposit insurance design, and banking concentration, utilizing unbalanced panel data from 122 countries between 2004 and 2021. By constructing novel indices-including a composite Moralhazard index to quantify deposit insurance-related risk incentives, a financial inclusion indicator, and a CONTAGION measure to capture the contagion effect of deposit insurance, we provide fresh empirical insights into the institutional synergies and trade-offs shaping banking system resilience. Our analysis reveals three key results: (1) Threshold effects exist in both deposit insurance coverage and financial inclusion levels that significantly influence bank stability; (2) The interaction between deposit insurance spread and financial inclusion may mitigate moral hazard incentives from deposit insurance systems at the micro level, it simultaneously amplifies cross-border contagion risks at the macro level; (3) Heterogeneous cross-country evidence reconciling how higher banking concentration elevates banks' risk.

Suggested Citation

  • Xiangyuan Yu & Yiming Chang & Jiaqi Li, 2025. "How do financial inclusion, deposit insurance, and bank concentration affect bank stability?," Prague Economic Papers, Prague University of Economics and Business, vol. 2025(3), pages 278-303.
    • Handle: RePEc:prg:jnlpep:v:2025:y:2025:i:3:id:893:p:278-303
    DOI: 10.18267/j.pep.893
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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