Blanket guarantee, deposit insurance, and risk-shifting incentive: evidence from Indonesia
Indonesia 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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