Do Deposit Insurance Systems Promote Banking Stability?

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.

Download Full-text

Sources Of Non-Performing Loans In Turkish Banking System

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v5i10.2595 ◽

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

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.  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.

Download Full-text

Real Deposit Insurance Coverage: An International Study

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v25i3.1022 ◽

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

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.

Download Full-text

SISTEM PENJAMINAN SIMPANAN (DEPOSIT INSURANCE SYSTEM) PADA INDUSTRI PERBANKAN INDONESIA

AT-TIJARAH: Jurnal Penelitian Keuangan dan Perbankan Syariah ◽

10.52490/at-tijarah.v1i2.717 ◽

2019 ◽

Vol 1 (2) ◽

pp. 77-90

Author(s):

Sjafruddin Sjafruddin

Keyword(s):

Deposit Insurance ◽

Insurance Premium ◽

Bank Risk ◽

Contagion Effect ◽

Insurance System ◽

Guarantee System ◽

Deposit Insurance System ◽

The Government ◽

Public Costs ◽

The Impact

Banking plays a very important role in the economy along with its function to channel funds from parties who have excess funds (surplus of funds) to those who need funds (lack of funds). If the banking industry does not work well, the economy will become inefficient and the expected economic growth will not be achieved. The risks that are always inherent in the financial and banking sectors, can trigger a crisis at any time and result in a collapse of the country's economy. To overcome the impact of the crisis, the government must pay quite large public costs. This article analyzes several important concepts, namely bank risk and the contagion effect, the operation of a deposit guarantee system that has been implemented in various countries after a financial crisis and how the deposit guarantee program is implemented in Indonesia. The results show that the Deposit Insurance System (DIS) can be implemented through law enforcement system, market discipline, political and economic freedom, low levels of corruption, strict regulations inbanking sector, setting an adequate deposit insurance premium based on the level of bank risk , and selective deposit guarantees. Keywords: Deposit Insurance System,Indonesia Deposit Insurance Corporation, Risk Abstrak Perbankan memegang peran yang sangat penting dalan perekonoman seiring dengan fungsinya untuk menyalurkan dana dari pihak yang mempunyai kelebihan dana (surplus of funds) kepada pihak-pihak yang membutuhkan dana (lack of funds). Apabila industri perbankan tidak bekerja dengan baik, maka perekonomian menjadi tidak efisien dan pertumbuhan ekonomi yang diharapkan tidak akan tercapai. Risiko yang selalu melekat dalam sektor keuangan dan perbankan, dapat memicu terjadinya krisis sewaktu-waktu dan berakibat lumpuhnya ekonomi negara. Untuk menanggulangi dampak krisis tersebut, pemerintah harus mengeluarkan biaya publik cukup besar. Artikel ini menganalisis beberapa konsep penting, yaitu risiko bank dan efek penularan (Contagion Effect),penyelenggaraan sistem penjaminan simpanan yang telah di implementasikan berbagai negara setelah terjadi krisis keuangan dan bagaimana implementasi program penjaminan simpanan di Indonesia.Hasilnya menunjukkan bahwaDeposit Insurance System (DIS) dapat diimplementasikan melalui sistem penegakan hukum yang kuat, disiplin pasar, kebebasan politik dan ekonomi, tingkat korupsi yang rendah, regulasi khususnya di bidang perbankan yang kuat, penetapan premi penjaminan simpanan yang memadai dan berdasarkan tingkat risiko bank, serta pemberian jaminan simpanan yang selektif. Kata Kunci:Deposit Insurance System, Lembaga Penjamin Simpanan, Risiko

Download Full-text

Deposit Protection and Bank Resolution

10.1093/law/9780198743057.001.0001 ◽

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.

Download Full-text

The determinants of conventional banks profitability in developing and underdeveloped OIC countries

Journal of Economics Finance and Administrative Science ◽

10.1108/jefas-05-2018-0043 ◽

2019 ◽

Vol 24 (47) ◽

pp. 4-28 ◽

Cited By ~ 2

Author(s):

Ahmad Al-Harbi

Keyword(s):

Deposit Insurance ◽

Banking System ◽

Ordinary Least Squares ◽

Policy Implications ◽

Data Set ◽

Content Type ◽

Pure Sample ◽

Insurance System ◽

Deposit Insurance System ◽

Conventional Banks

Purpose The purpose of this study is to investigate the effect of internal and external variables on the profitability of conventional banks operating on developing and underdeveloped countries, the Organization of Islamic Cooperation (OIC) states. Design/methodology/approach In this paper, the author uses ordinary least squares fixed-effects model on an unbalanced panel data set of all conventional banks operating in OIC countries (52 countries included from 57) over the period 1989-2008, 686 banks. Findings The results suggest that equity, foreign ownership, off-balance sheet (OBS) activities, real gross domestic product growth, real interest rate and concentration foster banks’ profitability. In addition, the results showed that the banking sector development and loans will increase banks’ profitability in the long run in the countries of the studies. In contrast, the study reported that deposits lower profitability. The study also revealed that GDP per capita, market capitalization and banks size have no impact on profitability. Practical implications The findings of this study have considerable policy implications. First, policymakers need to regulate nontraditional activities to avoid any financial crisis because banks in OIC countries are heavily engaged in nontraditional activities to boost its profit. Second, policymakers are advised to improve the deposit insurance system to insure the stability of the financial system as well as improving banks’ profitability. Third, policymakers need to improve the efficiency of the stock market, maintain small banking system and encourage foreign investments in the banking system. Originality/value The paper adds to the literature on the commercial bank’s profitability determinants. In particular, such study has not been conducted on OIC countries, and the study included all mainstream banks and incorporated the effect of deposit insurance system so far. Also, pure sample of conventional banks used as many conventional banks in OIC countries have Islamic windows or offer Islamic products. In addition, this study investigated the effect of OBS activities on net interest margin (NIM) because the studies that explored this interrelationship are limited especially for developing and under developed countries. The results showed that OBS activities contributed significantly and positively to return on assets and NIM. Moreover, this paper used a pure sample of conventional banks to avoid any biasness; see data section. Moreover, this study gives an idea about the economic situation and financial conditions of OIC countries during the period of the study.

Download Full-text

Money laundering and financial stability: does adverse publicity matter?

Journal of Financial Regulation and Compliance ◽

10.1108/jfrc-09-2021-0075 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Bahriye Basaran-Brooks

Keyword(s):

Money Laundering ◽

Financial Stability ◽

Global Financial Crisis ◽

Banking System ◽

Public Confidence ◽

Content Type ◽

Reputational Risk ◽

The Global Financial Crisis ◽

The Impact

Purpose Already suffering reputational damage from the global financial crisis, banks face a further loss of trust due to their poor money laundering (ML) compliance practices. As confidence-driven institutions, the loss of reputation stemming from inadequate compliance with regulations and policies labels banks as facilitators of crime and destroys public trust both in the bank itself, peer banks and the wider banking system. Considering the links between financial stability and adverse publicity about banks, this paper aims to critically examine the implications of ML-specific bank information on financial stability. Design/methodology/approach This paper adopts a content analysis and a theoretical discussion by critically evaluating the role of bank compliance information on stability with references to recent case studies. Findings This paper establishes that availability of information regarding a bank involved in or facilitating ML might pose a threat to financial stability if bank counterparties cut their ties with the bank in question and when bank stakeholders show a strong and sudden negative reaction to adverse publicity. Though recent ML scandals have not caused immediate instability, general loss of confidence associated with reputational risk have had a destabilising effect on affected banks’ capital and liquidity. Originality/value There has been surprisingly little discussion to date on the impact of publicly available bank information on financial stability and public confidence within the ML compliance framework. This paper approaches the issue of publicly available banking compliance information solely through the prism of public confidence and reputational risk and its impact on macro-stability by examining recent ML scandals.

Download Full-text

Perspectives of the financial stability protection and banking risk prevention

Ekonomija teorija i praksa ◽

10.5937/etp2103109q ◽

2021 ◽

Vol 14 (3) ◽

pp. 109-126

Author(s):

Miroslav Čavlin ◽

Jelena Vapa-Tankosić ◽

Srđan Egić

Keyword(s):

Financial Stability ◽

Deposit Insurance ◽

Financial System ◽

Risk Prevention ◽

Financial Security ◽

Insurance System ◽

Deposit Insurance System ◽

The Republic ◽

The Stability ◽

Security Network

The deposit insurance system is the backbone of the protective mechanism of the financial security network, which enables the prevention of a "stampede" of depositors on banks in order to prevent a negative effect on the stability of the financial system. Therefore, especially in the event of a crisis, such as the pandemic caused by COVID-19, the protection of financial stability and depositors emphasizes the importance and role of efficient organization of the deposit insurance system. The paper starts from the analysis of the concept of a financial security network in order to create a relevant basis for modeling the directions of development of the system of financial stability protection and risk prevention of banking operations. The aim of the paper is to conduct a research into the theoretical and empirical findings in order to identify the potential for a more effective deposit insurance system in the Republic of Serbia. An efficient deposit insurance system in the Republic of Serbia should provide support and protection for depositors, most of whom do not possess the necessary knowledge which can help them assess banking risks, i.e. risks of financial failure and crisis. The development of our deposit insurance system should be aimed at strengthening the stability of the financial system and banking operations, i.e. its resilience to crisis disturbances on the market.

Download Full-text

Research on the Deposit Insurance Pricing Under the Marketing RMB Interest Rate

Applied Finance and Accounting ◽

10.11114/afa.v2i2.1721 ◽

2016 ◽

Vol 2 (2) ◽

pp. 86

Author(s):

Lingyan Sun ◽

Tianning Shi ◽

Panlu Shi

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Deposit Insurance ◽

Insurance Pricing ◽

Insurance System ◽

Functional Representation ◽

Interest Rate Marketization ◽

Deposit Insurance System ◽

The Interest Rate ◽

The Impact

The deposit insurance pricing is the core issue of deposit insurance system, it determines the success or failure of the deposit insurance system in a way. In the current deposit insurance pricing methods, we treat the interest rates as a constant. With the interest rate marketization in China, the deposit insurance pricing methods have also changed accordingly. In this paper, we will give a functional representation of the impact of RMB interest rate marketization on interest rate by fitting the coefficients of the cubic function. Then we will use the data of 2013 to prove it. For the points that do not conform to this rule, we also have some explanations related to the major economic events at that time.

Download Full-text

Osiguranje depozita i utjecaj na financijski sustav

Oeconomica Jadertina ◽

10.15291/oec.2740 ◽

2018 ◽

Vol 8 (2) ◽

pp. 48-64

Author(s):

Martina Maté

Keyword(s):

Deposit Insurance ◽

Global Financial Crisis ◽

Financial System ◽

System Stability ◽

Public Confidence ◽

Insurance System ◽

Deposit Insurance System ◽

The World ◽

The Republic ◽

Fiscal Pressure

The importance of financial system stability is best demonstrated by the recent global financial crisis. The slump in the financial markets and institutional disturbances have threatened seriously the financial systems around the world and questioned their role in mediating the exchange of capital surplus and their targeting to deficit entities. Many financial institutions have found themselves on the verge of collapse, and countries around the world have launched expansionary measures and invested huge resources in rescuing their markets. As financial and banking crises always cause fiscal pressure, the importance of upgrading the financial system through preventive measures that will preserve public confidence in its security and protect the economy from major losses is surely in the interest of governments worldwide. The goal of these measures, referred to as the financial system security grids, is to create controlled conditions for less informed market participants and protect them from loss. Deposit insurance systems have been recognized as one of the key elements of the financial system preventive security grids. The most important goal of the organized deposit insurance system is to protect the assets of so-called “small savers” or consumers unable to independently assess the risk of the institution in which they relocate their surplus funds. The aim of this paper is to explain the role of an organized deposit insurance system with special attention to the system in the Republic of Croatia.

Download Full-text

Bank Runs and Moral Hazard

The Oxford Handbook of Banking ◽

10.1093/oxfordhb/9780198824633.013.22 ◽

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.

Download Full-text