Deposit Insurance and Financial Development

By Robert J. Cull, Lemma W. Senbet, M. Sorge. 2001

201 citations recorded by the source corpus.

This paper provides empirical evidence on the impact of deposit insurance on financial development and stability, broadly defined to include the level of banking activity and the stability of the banking sector. 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 concerns by estimating a generalized Tobit model both via maximum likelihood and theHeckman two-stepmethod. 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 insurancemight have a negative impact on financial development and growth in the long run, 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 banksÕ risk-taking behavior.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/b266d5e3f731d934f5bcc0d59cfd20f8c81f8105

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Citations in the corpus

The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis (2006, background): “Kane (2000), Cull et al. (2001) , Demirguc-Kunt and Detragiache (2002), Demirguc-Kunt and Kane (2002), and Laeven (2002) conclude that a sound legal system with proper enforcement of rules reduces the adverse effects of deposit insurance on bank risk-taking.”
Bank Regulation and Supervision: What Works Best? (2001, background): “For instance, expanded banking powers are associated with a lower cost of capital and less stringent cash-flow constraints [Berger and Udell (1996), DeLong (1991) and Ramirez (1995, 1999)]. Vennet (1999), moreover, finds that unrestricted banks have higher levels of operational efficiency than banks”
The economic value of regulated disclosure: Evidence from the banking sector (2006, methodology): “The data from the survey have been extensively used in recent bank regulation studies (e.g., Barth et al., 2004; Beck et al., 2003; Cull et al., 2005; Cleassens and Laeven, 2004; and DemirgucKunt, and Detragiache, 2004).”
Bank regulation and risk-taking incentives: An international comparison of bank risk (2005, methodology): “This latter result is consistent with the empirical evidence in Kane (2000), Cull et al. (2001), Demirgüc-Kunt and Detragiache (2002), or Laeven (2002), that shows deposit insurance adds to banking system fragility in countries with poor institutional environments.”
Determinants of bank market structure: efficiency and political economy variables (2009, methodology): “measure has also been used by Demirgüc-Kunt et al. (2004), Beck et al.”
Does Deposit Insurance Improve Financial Intermediation? Evidence from the Russian Experiment (2011, background): “1 See, for example, Diamond and Dybvig (1983), Chari and Jagannathan (1988), Kane (1995), Calomiris (1996), Bhattacharya et al.”