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.     

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 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.     

Market discipline and deposit insurance reform in Japan

On April 1, 2002, the Japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits. This paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline. I find that the reform raised the sensitivity of interest rates on deposits, and that of deposit quantity to default risk. In addition, the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks. These results suggest that the deposit insurance reform enhanced market discipline in Japan. I also find, however, that too-big-to-fail (TBTF) policy became a more important determinant of interest rates and deposit allocation after the reform, thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline.     

BANK PRIVATIZATION AND CONVERGENCE OF PERFORMANCE: INTERNATIONAL EVIDENCE

We trace the extent of performance deviation of privatized banks from established private banks in 30 countries from 1994 to 2005 and investigate the role of bank regulatory and supervisory norms, market competition, ownership structure, deposit insurance scheme, and governance structure affecting the deviation. Evidence shows that privatization does improve the performance of banks in the first year of being privatized, but performance gradually declines, which is consistent with the government restructuring argument before the privatization. Governance, foreign ownership, banking freedom (regulations), and the deposit insurance scheme in respective economies are found to affect performance deviation significantly.     

Bank credit default swaps and deposit insurance around the world

We investigate the impact of deposit insurance schemes on banks' credit risk – a predictor of failure and a key element in the current financial crisis. Unlike most studies, which use balance sheet measurements of risk, we adopt a forward-looking and market-based measure of bank credit risk: the credit default swap (CDS) spread. We find that banks in countries with explicit deposit insurance systems have higher CDS spreads, supporting the “moral hazard” view. The results suggest that deposit insurance design features that lessen the adverse impact are risk-adjusted premium, coinsurance systems, government-established systems, “risk-minimizing” systems, and systems with dual-funding sources. Full coverage appears to stabilize bank risk only during the financial crisis period. More stringent bank regulation, such as capital adequacy regulation and independent supervision, could reduce the undesirable impact of deposit insurance. Deposit insurance seems to help stabilize volatile markets, as evidenced during the financial crisis and in countries with greater market volatility. In addition, we find that the adverse impact of deposit insurance on bank credit risk is more pronounced for banks with low asset quality and low liquidity.     

市场约束、显性存款保险制度与银行风险承担——基于回归控制法的研究

基于我国利率市场化进程日趋完善和新推出显性存款保险制度的金融大背景,本文从市场约束与显性存款保险制度的视角,将显性存款保险制度政策视为一个“准自然实验”,采用2010~2016年的面板数据,研究了存款保险制度及其与市场约束的相互作用对银行风险承担的影响,并藉此评价了其政策效应。研究结果表明:(1)我国不同类别商业银行的两类市场约束效应存在较大差别。就价格约束效应而言,对地方银行显著有效,而对全国性银行和外资银行则不显著;就数量约束效应而言,三类银行均不显著。(2)基于回归控制法的估计结果表明,存款保险制度的实施对银行风险承担有显著的正向影响,且其对地方银行的冲击强于全国性银行。(3)进一步基于非线性双重差分的估计结果显示,存款保险制度显著弱化了市场约束对银行风险承担的负向影响,表明我国存款保险制度的政策影响逐渐开始发挥出来。     

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.     

Private deposit insurance,deposit flows,bank lending,and moral hazard

We examine the role of private unlimited deposit insurance as a complement to federal deposit insurance for deposit flows, bank lending, and moral hazard during a crisis. We find that banks whose deposits are federally and privately fully insured obtain more deposits and expand lending, in contrast to banks whose deposits are only federally insured. We also document that privately insured banks remain prudent in the loan origination process during the subprime crisis. Our results offer novel insights into depositor and bank behavior in the presence of multiple deposit insurance schemes with differential design features. They also illustrate how private sector solutions incentivize prudent bank behavior to strengthen the financial safety net.     

How does deposit insurance affect bank risk? Evidence from the recent crisis

Deposit insurance is widely offered in a number of countries as part of a financial system safety net to promote stability. An unintended consequence of deposit insurance is the reduction in the incentive of depositors to monitor banks which lead to excessive risk-taking. We examine the relation between deposit insurance and bank risk and systemic fragility in the years leading up to and during the recent financial crisis. We find that generous financial safety nets increase bank risk and systemic fragility in the years leading up to the global financial crisis. However, during the crisis, bank risk is lower and systemic stability is greater in countries with deposit insurance coverage. Our findings suggest that the “moral hazard effect” of deposit insurance dominates in good times while the “stabilization effect” of deposit insurance dominates in turbulent times. The overall effect of deposit insurance over the full sample we study remains negative since the destabilizing effect during normal times is greater in magnitude compared to the stabilizing effect during global turbulence. In addition, we find that good bank supervision can alleviate the unintended consequences of deposit insurance on bank systemic risk during good times, suggesting that fostering the appropriate incentive framework is very important for ensuring systemic stability.     

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.     

Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence

Using bank-level data for 80 countries in the years 1988–95,this article shows that differences in interest margins andbank profitability reflect a variety of determinants: bank characteristics,macroeconomic conditions, explicit and implicit bank taxation,deposit insurance regulation, overall financial structure, andunderlying legal and institutional indicators. A larger ratioof bank assets to gross domestic product and a lower marketconcentration ratio lead to lower margins and profits, controllingfor differences in bank activity, leverage, and the macroeconomicenvironment. Foreign banks have higher margins and profits thandomestic banks in developing countries, while the opposite holdsin industrial countries. Also, there is evidence that the corporatetax burden is fully passed onto bank customers, while higherreserve requirements are not, especially in developing countries.     

The Cost of Deposit Insurance for Privately Held Banks: A Market Comparable Approach

Previous empirical studies that use an option pricing model to estimate deposit insurance costs have been limited to banks that issue publicly traded securities: a bank's security prices are used to infer its risk characteristics. However, if deposit insurance costs are needed for privately held banks, as would be the case under a system of risk-based insurance premiums, then an alternative method is required. This paper presents a “market comparable” approach for valuing private banks' deposit insurance. The approach first uses information on public depository institutions to identify the statistical relationships between a bank's supervisory accounting data and its risk characteristics derived from equity market data. Second, it uses these relationships to predict the risk characteristics of a private depository institution based on its supervisory accounting data. This approach is applied to over 7000 private banks and thrifts to estimate their risk characteristics and their implied risk-neutral and physical probabilities of insolvency. For the vast majority of institutions, these risk characteristics and insolvency probabilities are within a reasonable range.     

Market discipline and deposit insurance

Cross-country evidence presented in this paper suggests that explicit deposit insurance reduces required deposit interest rates, while at the same time it lowers market discipline on bank risk taking. Internationally, deposit insurance schemes vary widely in their coverage, funding, and management. This reflects that there are widely differing views on how deposit insurance should optimally be structured. To inform this debate, we use a newly constructed data set of deposit insurance design features to examine how different design features affect deposit interest rates and market discipline.     

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.     

Deposit insurance and bank risk-taking: Evidence from internal loan ratings

We analyze the effect of deposit insurance on the risk-taking behavior of banks in the context of a quasi-natural experiment using detailed credit registry data. Using the case of an emerging economy, Bolivia, which introduced a deposit insurance system during the sample period, we compare the risk-taking behavior of banks before and after the introduction of this system. We find that in the post-deposit insurance period, banks are more likely to initiate riskier loans (i.e., loans with worse internal ratings at origination). These loans carry higher interest rates and are associated with worse ex-post performance (i.e., they have higher default and delinquency rates). Banks do not seem to compensate for the extra risk by increasing collateral requirements or decreasing loan maturities. We also find evidence that the increase in risk-taking is due to the decrease in market discipline from large depositors. Finally, differences between large (too-big-to-fail) and small banks diminished in the post-deposit insurance period.     

社区银行发展的经济学分析与路径选择

社区银行是一种充满生命力的经营模式.从发达国家的实践来看,社区银行的蓬勃发展得益于正确的市场定位、明晰的产权结构、强力的政策扶持以及有序的金融监管.从经济学上看,这一模式的存在是源于金融专业化分工的客观要求、在特定的领域拥有信息和交易成本的比较优势.建立一个覆盖城乡的社区银行体系能够弱化我国经济发展中典型的二元经济结构.结合我国国情,社区银行的发展路径包括:改造现存的部分地方中小银行,由民营资本组建新的社区银行,将民间金融组织引导规范成社区银行.此外,社区银行的有效运行还需要建立健全法律体系、建立存款保险制度等配套措施.     

The use of Hurst and effective return in investing

This study measures the deposit insurance premium under stochastic interest rates for Taiwan's banks by applying the two-step maximum likelihood estimation method. The estimation results suggest that the current premiums—charging 5, 5.5, and 6 basis points per dollar of insured deposits—are too low, but largely reflect the rank orders of the risks of the insured banks. Moreover, the regression results indicate that asset volatility dominates bank size in determining the insurance premium. When the volatility risk is decomposed into two parts, credit risk significantly dominates interest-rate risk. An examination of bank characteristics indicates that privately owned old banks are more likely to have lower levels of credit risk, asset volatility, and deposit insurance premiums than state-owned banks and newly chartered banks.     

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.     

跨国银行境外分支机构的存款保险问题

本文通过不同国家与地区对跨国银行境外分支机构的存款保险安排进行考察,分析了影响不同国家和地区跨国银行境外分支机构存款保险选择的主要因素,并在借鉴国际经验和结合我国国情的基础上,提出了我国对外国银行分支机构和本国银行境外分支机构存款保险的可行选择。