Does deposit insurance retard the development of non-bank financial markets?

Whether, and how, the introduction of deposit insurance affects non-bank financial market development depends on whether banks and non-bank financial markets are substitutes or complements and theory has conflicting views. Using data on 134 countries over a 28-year period and several identification...

Full description

Saved in:
Bibliographic Details
Published in:Journal of banking & finance 2016-05, Vol.66, p.102-125
Main Authors: Bergbrant, Mikael C., Campbell, Kaysia T., Hunter, Delroy M., Owers, James E.
Format: Article
Language:English
Subjects:
Banking industry
Deposit insurance
Financial market development
Law enforcement
Manycountries
Non-bank financial markets
Risk-shifting
Securities markets
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Whether, and how, the introduction of deposit insurance affects non-bank financial market development depends on whether banks and non-bank financial markets are substitutes or complements and theory has conflicting views. Using data on 134 countries over a 28-year period and several identification strategies we find that the introduction of deposit insurance retards the equity market, the non-bank depositaries sector, and the banking sector when law and order is weak. While strong law and order mitigates this effect, it does not lead to a positive outcome for all markets. For non-bank financial markets, the effect is greater in the long run so that while deposit insurance increases banking sector development in the long run, it retards non-bank financial markets regardless of the level of law and order. Finally, several design features exacerbate the negative outcomes. Our results have important policy implications for implementing or altering deposit insurance schemes.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2016.01.013