Deposit insurance coverage,ownership, and banks' risk-taking in emerging markets |
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Authors: | Apanard Angkinand Clas Wihlborg |
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Affiliation: | 1. The Milken Institute, 1250 Forth Street, Santa Monica, CA 90401, USA;2. Argyros School of Business and Economics, Chapman University, One University Drive, Orange, CA 92866, USA;3. Copenhagen Business School, USA |
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Abstract: | 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. |
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Keywords: | G21 G28 G32 |
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