Adverse Selection and Competing Deposit Insurance Systems in Pre-Depression Texas

In 1910, Texas instituted a unique deposit insurance program for its state chartered banks by providing a choice between two separate plans: the depositors guaranty fund, similar to insurance schemes in several other states, and the depositors bond security system, which required the procurement of a privately issued guarantee of indemnity. While, under most deposit insurance schemes, the incentive to monitor the financial condition of individual banks simply devolves from depositors to regulators, the bond security system established in Texas distinguished itself by attempting to reintroduce market discipline through the indemnity requirement. Using a probit model with heteroscedasticity, we find evidence that the choice of insurance coverage led to risk-sorting among the banks, with relatively conservative and financially secure institutions opting for the comparatively rigorous bond security system. In addition, the bank failure record indicates the risk differentials between banks in the two plans persisted over time and even possibly grew, suggesting the bond security system at least partially avoided the moral hazard incentives associated with the fixed-rate depositors guaranty plan. These findings support the general view that market discipline is effective in banking.     

论存款保险制度下的风险防范

存款保险制度是一种金融保障制度。建立存款保险制度有利于降低金融风险,防止挤兑发生及危机扩散。当个别银行出现流动性风险时,存款人因为有了相关的法律制度作保证,不再产生巨大的恐惧心理,能避免发生挤兑风潮。同时,建立存款保险制度有利于保护存款人的利益。在投保银行面临支付危机时提供救助,在投保银行破产倒闭时依法清偿存款人的存款,从而保护了存款人的利益。     

Deposit Insurance and the Discount Window: Pricing under Asymmetric Information

The risk-sensitive pricing of deposit insurance and the discount window is determined in an environment where banks have private information concerning their financial conditions. The two facilities are managed jointly; an incentive-compatible policy is designed such that banks' choice of terms at which they can obtain insurance and access to discount window credit will reveal their asset quality. The function of the discount window is to be a risk-neutral “lender of last resort” to banks in a market dominated by risk-averse depositors.     

Bank Time Deposit Rates and Market Discipline in Poland: The Impact of State Ownership and Deposit Insurance Reform

This paper examines the impact of ownership structure and changes in the deposit insurance system on the market for bank time deposits in Poland. In an environment of less restrictive bank supervision and a deposit insurance policy that favored state banks, we find that depositors exacted a price for risk-taking. After a new law increasing insurance coverage for private banks went into effect, however, bank specific variables became less important in explaining differences in deposit interest rates. We report, however, that the three fully guaranteed state banks pay significantly lower rates than private banks. Moreover, other state-owned banks, with the same explicit guarantee as private banks, pay significantly lower rates than private banks, so it appears that depositors treat these state-owned banks as if they have a larger implicit guarantee.     

Islamic Banks,Deposit Insurance Reform,and Market Discipline: Evidence from a Natural Framework

Although it has been intensively claimed that Islamic banks are subject to more market discipline, the empirical literature is surprisingly mute on this topic. To fill this gap and to verify the conjecture that Islamic bank depositors are indeed able to monitor and discipline their banks, we use Turkey as a test setting. The theory of market discipline predicts that when excessive risk taking occurs, depositors will ask higher returns on their deposits or withdraw their funds. We look at the effect of the deposit insurance reform in which the dual deposit insurance was revised and all banks were put under the same deposit insurance company in December 2005. This gives us a natural experiment in which the effect of the reform can be compared for the treatment group (i.e., Islamic banks) and control group (i.e., conventional banks). We find that the deposit insurance reform has increased the market discipline in the Turkish Islamic banking sector. This reform may have upset the sensitivities of the religiously inspired depositors, and perhaps more importantly it might have terminated the existing mutual supervision and support among Islamic banks.     

The Political Economy of Deposit Insurance

This paper uses a political economy framework to analyze cross-country differences in deposit insurance coverage. It finds supporting evidence of the significance of private interest theories in explaining coverage of deposit insurance. Deposit insurance coverage is significantly higher in countries where poorly capitalized banks dominate the market and in countries where depositors are poorly educated. The analysis does not find that coverage is significantly related to political-institutional variables, such as the degree of democracy or restraints on the executive, or to proxies for the general level of institutional development, such as per capita income or property rights. These results provide evidence in support of the private interest view, according to which risky banks lobby for extensive coverage.     

Capital Structure, Agency Problems, and Deposit Insurance in Banking Firms

This paper applies and synthesizes various theories of corporate finance, including capital structure, agency insurance, and regulation, to the case of banking firms and the deposite insurance system. It is argued that a value-maximizing bank would reach its optimal capital structure by minimizing the agency costs of incentive conflicts among stockholders, managers, uninsured depositors, and the deposit insurance agency. Although a regulatory imposed capital requirment may reduce the agency costs inherent in the insurance contact, it cannot produce a universal capital structure that is optimal for all insured banks. The observed capital structure patterns also suggest that banks actively seek an optimal capital structure.     

Depositors’ Response to Deposit Insurance Reforms: Evidence from Japan, 1990–2005

We empirically investigate depositors’ response to various bank risk measures under different deposit insurance regimes. We find that depositor discipline is most significant during periods of full insurance coverage rather than during limited insurance coverage, and that deposit withdrawal induces bank managers to carry out aggressive restructuring. Our evidence suggests that the magnitude of depositor discipline is affected by both the extent of insurance coverage, and by the degree of public confidence in the stability of the financial system and the extent of regulatory forbearance. There is little evidence that higher interest rates at riskier banks promote depositor discipline.     

Deposit Insurance, Capital Adequacy Requirements and Interest Rate Dynamics

This paper examines the long run interaction among deposit insurance, bank deposit rates and capital adequacy requirements. Using analysis similar to the price discrimination model of Lott and Roberts (1991) we find that a competitive environment among banks would link the spread between insured and uninsured deposit rates to the size of the insurance premium. We also find that banks that choose to operate at the regulatory minimum capital level, would increase asset risk with increased capital requirements if (1) the implicit interest paid to insured and uninsured depositors is equally sensitive to changes in risk and capital adequacy and (2) the insurance premium is independent of the level of risk and capital adequacy. Under the present risk-based premium structure, asset risk has the potential to decline when the regulatory agency raises capital requirements. Finally, we examine the time series behavior of insured and uninsured interest rates to see if it is consistent with our theoretical model. We find that insured and uninsured rates, along with deposit insurance premiums, are cointegrated series as suggested by our model.     

Depositors’ trust: Some empirical evidence from Indonesia

We develop a comprehensive index, based on Robbins and Judge’s (2008) five dimensions of trust, to measure depositors’ trust in individual banks as well as trust in the banking industry and financial safety net. Using a survey of 992 retail depositors in Indonesia, we find that trust in individual banks where depositors save their money is greater than trust in the overall banking industry and financial safety net. We also find that depositors’ trust is affected by personal characteristics—for instance, women and older depositors have relatively less trust. Depositors tend to put their trust in individual banks and the financial system if they have greater trust in information conveyed by the government. Religious and economic values have positive effects on depositors’ trust at both the micro and macro levels. Our results also document that risk-taking behavior is positively associated with depositors’ trust. Furthermore, we find that more-educated depositors have significantly less trust. This finding might imply that the erosion of market discipline by depositors in a country with relatively generous deposit insurance, such as Indonesia, can be mitigated through greater financial literacy.     

对存款保险制度功能的理性思考

存款保险制度在保护存款人利益、稳定金融体系、克服逆向选择与道德风险、改善银行经营环境及促进银行公平竞争等方面发挥着一定的积极作用,但对这些功能不能无限夸大,辩证地看待更有利于走出对存款保险制度认识的误区,切不可忽视其局限性而将其功能过分拔高;存款保险制度本身也存在某些固有的缺陷,它所带来的负面效应也应当引起我们足够的重视;存款保险制度对金融稳定只能治标而不能治本,解决我国金融体系内在问题的根本途径应当是继续深化金融体制各方面的改革。     

Deposit insurance and subsidized recapitalizations

The 2007–2009 financial crisis saw a vast expansion in deposit insurance guarantees around the world and yet our understanding of the design and consequences of deposit insurance schemes is in its infancy. We provide a new rationale for the provision of deposit insurance. In our model the banking sector exhibits both adverse selection and moral hazard, which implies that the social benefits of bank monitoring must for incentive reasons be shared between depositors and banks. Consequently, socially too few deposits are made in equilibrium. Deposit insurance – or, equivalently, bank recapitalization – corrects this market failure. We find that deposit insurance should be funded not by banks or depositors but out of general taxation. The optimal level of deposit insurance varies inversely with the quality of the banking system. Hence, when the soundness of the financial sector is uncertain, governments should consider supporting deposit insurance schemes and undertaking subsidized recapitalizations.     

Do Depositors Punish Banks for Bad Behavior? Market Discipline,Deposit Insurance,and Banking Crises

This paper empirically investigates two issues largely unexplored by the literature on market discipline. We evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline. We focus on the experiences of Argentina, Chile, and Mexico during the 1980s and 1990s. We find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates. Deposit insurance does not appear to diminish the extent of market discipline. Aggregate shocks affect deposits and interest rates during crises, regardless of bank fundamentals, and investors' responsiveness to bank risk taking increases in the aftermath of crises.     

Institutions and Deposit Insurance: Empirical Evidence

Do banks’ responses to changes in deposit insurance vary across countries even if the countries have comparable institutions? If so, by how much? Using data on the financial performance of large banks in 15 financially and economically developed countries, we find that where deposit insurance has an effect, it is large and varies depending on the level of economic freedom, rule of law and corruption in the bank’s home country. As in prior papers, we show that during stable economic periods, increases in deposit insurance are associated with higher bank risk, both problem loans and leverage. In most, but not all, cases stronger institutions temper these effects. The institutions’ effects are substantial. For example, average changes in the rule of law double the impact of a change in deposit insurance on bank leverage. We contribute to the substantial literature in this area by showing that the institutional effects are significant even across a set of countries with comparable institutions; by conducting a careful calibration of the economic significance of the effects; by providing evidence that during stable periods changes in deposit insurance only affect bank risk and not other measures of performance; and finally by showing that the effects of both deposit insurance and institutions vary across stable and crisis economic periods. The stable period results are consistent with the moral hazard effects of deposit insurance, while the crisis period results are consistent with endogeneity concerns that poor bank performance could drive changes in regulations.     

Deposit insurance around the world: A comprehensive analysis and database

This paper provides a comprehensive, global database of deposit insurance arrangements as of 2013. We extend our earlier dataset by including recent adopters of deposit insurance and information on the use of government guarantees on banks’ assets and liabilities, including during the recent global financial crisis. We also create a Safety Net Index capturing the generosity of the deposit insurance scheme and government guarantees on banks’ balance sheets. The data show that deposit insurance has become more widespread and more extensive in coverage since the global financial crisis, which also triggered a temporary increase in the government protection of non-deposit liabilities and bank assets. In most cases, these guarantees have since been formally removed but coverage of deposit insurance remains above pre-crisis levels, raising concerns about implicit coverage and moral hazard going forward.     

存款保险、市场竞争与银行经营稳健性

本文基于银行存款市场空间竞争模型,探讨存款保险制度的实施效果和福利效应,及其与市场竞争政策的交互作用。研究表明,政府隐性担保尽管能够保障存款人利益,但会降低存款人对银行经营稳健性的要求,使得银行追求高风险高收益资产从而降低经营稳健性;而市场化的存款保险制度通过费率与风险挂钩的激励机制,能够有效提升银行经营稳健性,同时避免过高政策成本负担,实现较高的社会福利水平。随着市场竞争强化,引入风险差别费率保险制度,在提升银行经营稳健性和增进社会福利方面的效果逐渐增强。模型分析表明,当长期允许机构自由进出市场时,政府强化竞争政策短期可能降低银行的经营稳健性,但长期内高风险银行逐渐退出市场而更有效率的低风险银行进入市场,这种柔性市场退出机制使得银行业整体经营稳健性增强。因此,在金融市场中强化竞争政策,推行并完善当前市场化的风险差别费率存款保险制度,长期内有助于在保护存款人利益的同时,提升银行稳健性和社会福利。     

Bank Insolvency, Deposit Insurance, and Capital Adequacy

This paper extends the Dowd (2000) model by introducing a risky investment technology. This assumption allows to introduce the possibility of an insolvency crisis. A banker may earn a positive expected profit by insuring depositors against the technological risk. If the bank has adequate capital, the insurance is credible and an insolvency crisis cannot occur. A public safety net may be unnecessary to prevent insolvency crises.     

On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study

We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a bank, who decide between withdrawing or keeping their money deposited. We have three treatments with different levels of deposit insurance which reflect the losses a depositor may incur in the case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositors’ actions affect the likelihood of bank runs. When decisions are not observable, higher levels of deposit insurance decrease the probability of bank runs. When decisions are observable, this need not to be the case. These results suggest that (i) observability might be considered as a partial substitute of deposit insurance and (ii) the optimal deposit insurance should take into account the degree of observability.     

Australia's Implicit Deposit Insurance — Should It Be Reconsidered?

Most major developed countries have bank deposit insurance; the European Parliament recently mandated it for all member countries. One of the characteristics of most deposit insurance schemes to protect depositors is that the banking industry funds the scheme through assessments. Interestingly, Australia does not have explicit deposit insurance and to date there has been little public debate on this subject. This paper proposes that such a debate should be initiated.     

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. 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.