Deposit insurance coverage, ownership, and banks' risk-taking in emerging markets

We ask how deposit insurance systems and ownership of banks affect the degree of market discipline on banks' risk-taking. Market discipline is determined by the extent of explicit deposit insurance, as well as by the credibility of non-insurance of groups of depositors and other creditors. Furt...

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Bibliographic Details
Published in:Journal of international money and finance 2010-03, Vol.29 (2), p.252-274
Main Authors: Angkinand, Apanard, Wihlborg, Clas
Format: Article
Language:English
Subjects:
Bank governance
Bank ownership
Banks
Corporate governance
Deposit insurance
Deposit insurance Non-performing loans Market discipline Bank ownership Bank governance
Emerging markets
Impact analysis
Insurance coverage
Loans
Market discipline
Non-performing loans
Ownership
Risk
Risk aversion
Studies
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Summary:We ask how deposit insurance systems and ownership of banks affect the degree of market discipline on banks' risk-taking. Market discipline is determined by the extent of explicit deposit insurance, as well as by the credibility of non-insurance of groups of depositors and other creditors. Furthermore, market discipline depends on the ownership structure of banks and the responsiveness of bank managers to market incentives. An expected U-shaped relationship between explicit deposit insurance coverage and banks' risk-taking is influenced by country specific institutional factors, including bank ownership. We analyze specifically how government ownership, foreign ownership and shareholder rights affect the disciplinary effect of partial deposit insurance systems in a cross-section analysis of industrial and emerging market economies, as well as in emerging markets alone. The coverage that maximizes market discipline depends on country-specific characteristics of bank governance. This “risk-minimizing” deposit insurance coverage is compared to the actual coverage in a group of countries in emerging markets in Eastern Europe and Asia.
ISSN:0261-5606
1873-0639
DOI:10.1016/j.jimonfin.2009.08.001