Bank Runs and Moral Hazard

2019 ◽  
pp. 684-706
Author(s):  
Deniz Anginer ◽  
Asli Demirgüç-Kunt
Keyword(s):  
Financial Stability ◽  
Deposit Insurance ◽  
Banking Sector ◽  
Recent Literature ◽  
Institutional Environment ◽  
Bank Runs ◽  
Costs And Benefits ◽  
Economic Costs ◽  
The Impact ◽  
Excessive Risk

Deposit insurance is a widely adopted policy to promote financial stability in the banking sector. Deposit insurance helps ensure depositor confidence in the financial system and prevents contagious bank runs, but it also comes with an unintended consequence of encouraging banks to take on excessive risk. In this chapter, we begin with a review of the economic costs and benefits associated with deposit insurance. Drawing on the recent literature, we then review and discuss optimal deposit insurance design and risk-based pricing of insurance premiums. Finally, we discuss the impact of the larger institutional environment on how well deposit insurance schemes work in practice.

scholarly journals Do Deposit Insurance Systems Promote Banking Stability?

2021 ◽  
Vol 9 (3) ◽  
pp. 52
Author(s):  
Nafis Alam ◽  
Ganesh Sivarajah ◽  
Muhammad Ishaq Bhatti
Keyword(s):  
Financial Stability ◽  
Deposit Insurance ◽  
Global Financial Crisis ◽  
Institutional Environment ◽  
Insurance Coverage ◽  
Banking System ◽  
Insurance System ◽  
Deposit Insurance System ◽  
Banking Stability ◽  
The Impact

During the global financial crisis (GFC), regulators and policymakers turned to deposit insurers, along with monetary and fiscal measures, to help restore market confidence and promote financial stability. These events have focused attention on the role of deposit insurers and their role in the banking system. Recent literature reveals that during the GFC, deposit insurance maintained banking stability and successfully prevented customers doing ‘runs’ on the banks. The objective of this paper is to examine the deposit insurance system’s coverage limits and the impact on banking stability, in the context of a jurisdiction’s economic and institutional environment. Our model examines 61 jurisdictions in Asia and Europe with explicit deposit insurance systems, covering the pre- and post-GFC period between 2004 and 2014. We also examine subsets to investigate the effects of the region by comparing Asia and Europe, as well as a subset using the date of establishment of the deposit insurance system to understand if maturity matters. The results indicate that deposit insurance systems, and specifically deposit insurance coverage levels, have both positive and negative effects on banking stability. We find significant associations with certain economic and institutional factors; however, there are differences between the models we ran. These can be ascribed to regional factors and the date of when a deposit insurance system was established.

Central bank digital currency: the future of institutional changes in the banking sector

2021 ◽  
Vol 2021 (2) ◽  
pp. 26-48
Author(s):  
Volodymyr MISHCHENKO ◽  
◽  
Svitlana NAUMENKOVA ◽  
Svitlana MISHCHENKO ◽  
◽  
...  
Keyword(s):  
Central Bank ◽  
Financial Stability ◽  
Banking Sector ◽  
Central Banks ◽  
Credit System ◽  
Bank Supervision ◽  
Bank Of China ◽  
Digital Currency ◽  
Financial Monitoring ◽  
The Impact

The purpose of the article is to reveal the essence and features of the introduction of digital currency of central banks and their impact on the conditions of monetary policy, financial stability, as well as institutional transformations in the development of national banking systems. The study is based on an analysis of projects of issuance and use of digital currencies of the ECB and central banks of leading countries, as well as the results of pilot projects of the National Bank of China on the use of the digital yuan and NBU on the e-hryvnia circulation. It is proved that digital currency of the central bank should be considered as a new dematerialized form of national currency in addition to cash and non-cash forms. Particular attention is paid to the study of the impact of the use of digital currency by central banks on the main parameters of economic policy. The main directions of potential influence of digital currency use on transformation of mechanisms of realization of monetary, budgetary and tax, macroprudential policy, maintenance of financial stability, activization of action of channels of the monetary transmission mechanism, and also on reforming of system of the state financial monitoring and bank supervision are substantiated. It is determined that one of the consequences of the use of digital currency will be the ability to ensure full control over all monetary transactions, which will help reduce the shadow economy and corruption. Structural and logical schemes of centralized and decentralized models of issuance and circulation of digital currency of central bank have been developed, directions of changes in the structure and functions of commercial and central banks, as well as in the structure of the financial and credit system in general have been substantiated.

scholarly journals EVALUATION OF FUNCTIONAL PERFORMANCE OF THE BANKING SYSTEM OF UKRAINE IN CONDITIONS FINANCIAL INSTABILITY

2021 ◽  
Author(s):  
Nataliia Danik ◽  
Kateryna Novak ◽  
Anastasiia Yakovenko
Keyword(s):  
Economic Crisis ◽  
Financial Stability ◽  
Structural Changes ◽  
Banking Sector ◽  
Synergistic Effects ◽  
Banking System ◽  
Scientific Article ◽  
Financial Instability ◽  
Industrial Complex ◽  
The Impact

The article covers the problems of the functioning of the banking sector of Ukraine during 2018-2021, as one of the main sectors of the financial market and the national economy as a whole. When analyzing the state of the banking sector, regularities and general trends in the functioning of the banking sector of Ukraine have been established, and appropriate calculations have been made. The impact of global financial crises on the activities of banking structures, which must operate in conditions of constant financial instability, is described. Today, the whole world, including Ukraine, is on the verge of a global financial and economic crisis. This raises the question of whether Ukrainian banks have the necessary margin of resilience to vulnerabilities to the financial and economic crisis. In recent years, the functioning and development of the banking system has been characterized by increased financial stability, the level of bank capitalization, liquidity, some improvement in asset quality, reducing risks in banking, as well as the presence of positive structural changes. Today, Ukraine's banking system operates in a complex socio-economic and legal environment, most of which - macroeconomic instability, irrational structure of the industrial complex, the crisis of science and technology, imperfect fiscal and monetary policy, low level of effective demand - complicate sustainable development banking sector and increase competitiveness. In conditions of instability, intensification of turbulent processes, the development of the banking system requires new innovative approaches to determining the mechanisms of effective functioning and stable development based on a system-synergetic approach, which led to the choice and relevance of the chosen topic of this scientific article. Efficiency of banks is a multicomponent, multifaceted, multidimensional system characteristic that depends on many factors and is an effective indicator of performance of functions and achievement of goals and objectives of banks development provided financial stability based on financial stability and dynamic balance, achievement of multiplicative and synergistic effects.

scholarly journals Sources Of Non-Performing Loans In Turkish Banking System

2011 ◽  
Vol 5 (10) ◽  
Author(s):  
Gokhan Karabulut ◽  
Mehmet Huseyin Bilgin
Keyword(s):  
Financial Stability ◽  
Deposit Insurance ◽  
Developing Economies ◽  
Banking System ◽  
Bank Loans ◽  
System Stability ◽  
Insurance System ◽  
Turkish Government ◽  
Deposit Insurance System ◽  
The Impact

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">The purpose of this paper is to examine the impact of the unlimited deposit insurance on non-performing loans and market discipline. Deposit insurance program play a crucial role in achieving financial stability. Governments in many advanced and developing economies established deposit insurance schemes for reducing the risk of systemic failure of banks. Deposit insurance has a beneficial effect of reducing the probability of a bank run.<span style="mso-spacerun: yes;">&nbsp; </span>However deposit insurance systems have its own set of problems. Deposit insurance systems create moral hazard incentives that encourage banks to take excessive risk. Turkey established an explicit deposit insurance system in 1960. Until 1994, the coverage determined by a flat rate but in that date, Turkey experienced a major economic crisis. In April 1994, Turkish government started to apply an unlimited deposit insurance scheme to restore banking system stability. Unlimited deposit insurance caused a remarkable increase at non-performing loans. This paper empirically estimates the impact of unlimited deposit insurance system on non-performing bank loans (NPLs) and analyses the other potential sources of NPLs. </span></p>

COMPETITION-STABILITY RELATIONSHIP IN DUAL BANKING SYSTEMS: EVIDENCE FROM EFFICIENCY-ADJUSTED MARKET POWER

2021 ◽  
pp. 1-24
Author(s):  
MUDEER AHMED KHATTAK ◽  
OMAR ALAEDDIN ◽  
MOUTAZ ABOJEIB
Keyword(s):  
Market Power ◽  
Financial Stability ◽  
Banking Sector ◽  
Market Competition ◽  
Policy Implications ◽  
Islamic Banks ◽  
Banking Competition ◽  
Precise Measure ◽  
Conventional Banks ◽  
The Impact

This research attempts to explore the impact of banking competition on financial stability employing a more precise measure of market power. It was found that Islamic banks are less stable and are enjoying lower market power. The analysis shows that higher market competition makes the banking sector vulnerable to defaults, supporting the “competition-fragility view”. This research finds no difference in the relationship for Islamic banks indicates that Islamic banks might be involved in traditional banking activities as conventional banks. The results are consistent and robust to different estimation approaches and subsamples. This research carries regulatory and policy implications.

scholarly journals FINANCIAL STABILITY AND INCOME GROWTH IN EMERGING MARKETS

2020 ◽  
Vol 23 (2) ◽  
pp. 201-220
Author(s):  
Bashir T. Mande ◽  
Afees Salisu ◽  
Adeola N. Jimoh ◽  
Fola Dosumu ◽  
Girei H. Adamu
Keyword(s):  
Stock Market ◽  
Emerging Markets ◽  
Financial Stability ◽  
Banking Sector ◽  
Financial System ◽  
Market Volatility ◽  
Income Growth ◽  
Stock Market Volatility ◽  
The Individual ◽  
The Impact

In this paper, we examine the extent to which financial stability matters for income growth in emerging markets. Using dynamic panel estimation techniques, we explore both the stock market and banking sector dimensions of the financial system to show that both stock market volatility and non-performing loans are detrimental to income growth in these markets. We, however, find the magnitude of the impact to be relatively more pronounced when the underlying source of instability in the financial system is stock market volatility. Overall, we find the impact of financial stability on income growth to be more statistically relevant when measured using the individual indicators of financial instability as compared to their composite indicator.

scholarly journals Factors Affecting Cost Efficiency in the Banking Sector of Kyrgyzstan

2017 ◽  
Author(s):  
Dastan Aseinov
Keyword(s):  
Economic Efficiency ◽  
Cost Efficiency ◽  
Financial Stability ◽  
Banking Sector ◽  
Banking System ◽  
Foreign Banks ◽  
Data Set ◽  
Factors Affecting ◽  
Domestic Banks ◽  
The Impact

Instabilities in the banking sector have had an adverse effect on the economy as a whole, since the largest share in the financial system and financial intermediation in Kyrgyzstan have been captured by banking sector. Economic efficiency in banking can be viewed as a source of financial stability of banking system. Economic efficiency of the banking is more important challenge not only for shareholders and managers of banks, and also for regulation and supervision authorities, and public and potential investors. The aim of this study is to examine factors affecting the banking cost efficiency for Kyrgyz banks. It is also important to choose the appropriate approach in measurement of banking cost efficiency, since there are many different methods. In this study preferred stochastic frontier approach which assumes random error term which captures sampling, measurement and specification errors. We adopted stochastic cost frontier model proposed by Battese ve Coelli (1995) which also allow to examine investigate the impact of variables on efficiency. We used unbalanced panel data set captured 17-23 Kyrgyz commercial banks for period of 2000-2013. Obtained results suggest that capitalization, foreign ownership, credit risk, liquidity risk and currency risk have most influence on cost efficiency scores of banks calculated averagely at level of 0,766. Overall results indicate that domestic banks more cost efficient than domestic private and foreign banks. Average cost efficiency scores of domestic banks, foreign and separately public banks are 0,848; 0,649 and 0,875, respectively.

scholarly journals Real Deposit Insurance Coverage: An International Study

2011 ◽  
Vol 25 (3) ◽  
Author(s):  
Marieta Velikova ◽  
Kevin Rogers
Keyword(s):  
Deposit Insurance ◽  
Banking Sector ◽  
Insurance Coverage ◽  
International Study ◽  
Political Rights ◽  
Political Factors ◽  
Insurance System ◽  
Deposit Insurance System ◽  
Political Economic ◽  
The Impact

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Recently several countries have implemented explicit deposit insurance systems. In most countries the adoption of an explicit deposit insurance system followed a banking crisis. This paper examines the impact of demographic, social, and political factors on the presence of an explicit deposit insurance system in a country. Moreover, for a subset of countries with explicit deposit insurance system we try to identify demographic, political, economic, and financial factors that affect the level of deposit insurance coverage. The findings suggest that life expectancy and political rights are related to whether an explicit deposit insurance system is in place or not. For countries with explicit deposit insurance systems the level of income, the importance of the banking sector within the financial system, and the development of domestic banking sector have a significant impact on the level of deposit insurance coverage level. The level of income, deposit money bank assets to GDP ratio, bank overhead costs to total assets ratio, presence of co-insurance, and type of administration are statistically significant in explaining differences in the level of coverage among countries. </span></span></p>

scholarly journals A structural approach to financial stability: On the beneficial role of regulatory governance

2013 ◽  
Vol 2 (1) ◽  
pp. 7-26 ◽  
Author(s):  
Benjamin Mohr ◽  
Helmut Wagner
Keyword(s):  
Latent Variables ◽  
Financial Stability ◽  
Structural Equation ◽  
Banking Sector ◽  
Institutional Environment ◽  
Equation Modeling ◽  
Regulatory Governance ◽  
Economic Statistics ◽  
Financial Soundness

This paper examines whether the governance of regulatory agencies – regulatory governance – is positively related to financial sector soundness. We model regulatory governance and financial stability as latent variables, using a structural equation modeling approach. We include a broad range of variables potentially relevant to financial stability, employing aggregate regulatory, banking and financial, macroeconomic and institutional environment data for a sample of 55 countries over a period from 2001 to 2005. Given the growing importance of macro-prudential analysis, we use the IMF’s financial soundness indicators, a relatively new body of economic statistics which focuses on the banking sector as a whole. Our empirical evidence indicates that regulatory governance has a beneficial influence on financial stability. Thus, our findings support the view that the improvement of regulatory governance arrangements should be a building block of financial reform

Deposit Protection and Bank Resolution

2015 ◽  
Author(s):  
Kleftouri Nikoletta
Keyword(s):  
Financial Stability ◽  
Deposit Insurance ◽  
Global Financial Crisis ◽  
International Standards ◽  
Banking Union ◽  
European Banking Union ◽  
Bank Resolution ◽  
Protection Systems ◽  
The Uk ◽  
The Impact

The 2007–08 global financial crisis proved that the interests of bank depositors are inadequately protected. Although a vast expansion in deposit protection systems around the world followed, our understanding of the impact of those systems and their interaction with bank resolution is still in its infancy. The focus of bank resolution studies has been on the largest systemically important banks, which have wholesale creditors who would be bailed in, leaving retail depositors untouched. However, many banks rely mostly on deposits for financing, and the number of banks of this form is expected to increase. This book aims to explain and provide current material analysis of deposit protection and bank resolution regimes. The analysis is based on an examination of the traditional rationales for creating deposit insurance and bank resolution, and a specific study of the UK, EU, and US legal frameworks. It aims to offer an analysis of this topic and to cover all relevant regulations, from its origins to its most recent developments, in a systematic and thorough way. It approaches the much-desired objective of financial stability from a different angle: that of depositor protection. This book comprises ten chapters, analysing: the rationales for creating a deposit protection system; the limitations of deposit protection systems; the European deposit insurance framework; the European banking union; recent cases on deposit guarantee schemes; international standards on deposit insurance; the UK deposit insurance framework; international and European regulatory developments on bank resolution; the UK Special Resolution Regime; and the US paradigm.

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