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Deposit Insurance and Bank Intermediation in the Long Run

Author

Listed:
  • Robert Cull

    (World Bank - Development Research Group (DECRG))

  • Lemma Senbet

    (University of Maryland - Robert H. Smith School of Business)

  • Marco Sorge

    (World Bank Group - International Finance Corporation)

Abstract
This paper provides empirical evidence on the impact of deposit insurance on the growth of bank intermediation in the long run. We use a unique dataset capturing a variety of deposit insurance features across countries, such as coverage, premium structure, etc. and synthesize available information by means of principal component indices. This paper specifically addresses sample selection and endogeneity concerns by estimating a generalized Tobit model both via maximum likelihood and the Heckman 2-step method. The empirical construct is guided by recent theories of banking regulation that employ an agency framework. The basic moral hazard problem is the incentive for depository institutions to engage in excessively high-risk activities, relative to socially optimal outcomes, in order to increase the option value of their deposit insurance guarantee. The overall empirical evidence is consistent with the likelihood that generous government-funded deposit insurance might have a negative impact on the long-run growth and stability of bank intermediation, except in countries where the rule of law is well established and bank supervisors are granted sufficient discretion and independence from legal reprisals. Insurance premium requirements on member banks, even when risk-adjusted, are instead found to have little effect in restraining banks' risk-taking behavior.

Suggested Citation

  • Robert Cull & Lemma Senbet & Marco Sorge, 2004. "Deposit Insurance and Bank Intermediation in the Long Run," BIS Working Papers 156, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:156
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    References listed on IDEAS

    as
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    Cited by:

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    2. Heinrich, Gregor, 2007. "El seguro de depósito dentro de la red de seguridad financiera [Deposit insurance within the financial safety-net]," MPRA Paper 47444, University Library of Munich, Germany.
    3. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does deposit insurance affect bank risk? Evidence from the recent crisis," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 312-321.
    4. repec:ces:ifodic:v:17:y:2019:i:1:p:50000000005871 is not listed on IDEAS
    5. Chen, Wang & Zhang, Zhiwen & Hamori, Shigeyuki & Kinkyo, Takuji, 2021. "Not all bank systemic risks are alike: Deposit insurance and bank risk revisited," International Review of Financial Analysis, Elsevier, vol. 77(C).
    6. Liu, Liuling & Zhang, Gaiyan & Fang, Yiwei, 2016. "Bank credit default swaps and deposit insurance around the world," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 339-363.
    7. Deniz Anginer & Ata Can Bertay, 2019. "Deposit Insurance," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 17(01), pages 03-08, May.
    8. Camara, Modibo K. & Montes-Negret, Fernando, 2006. "Deposit insurance and banking reform in Russia," Policy Research Working Paper Series 4056, The World Bank.

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    More about this item

    Keywords

    Deposit Insurance; Moral Hazard; Bank Regulation and Supervision; Financial Development;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G2 - Financial Economics - - Financial Institutions and Services
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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