The Deposit Insurance Scheme and the moral hazard hypothesis: Nigerian evidence

The implementation of a deposit insurance scheme entails a trade off. On one hand, as shown in theoretical and empirical studies, a deposit insurance scheme reduces the likelihood of a bank run. On the other hand, a deposit insurance scheme induces moral hazard among bankers that may lead to bank failures. We rigorously test the effect of different deposit coverage limit and the implementation of a differential premium treatment on bankers’ behaviors in the deposit and credit market. We do so by designing a laboratory experiment that involves real bankers as participants. We find that the coverage limit treatments do not have any effect on deposit rate offer. Nevertheless, we find that a high deposit coverage limit induces smaller banks to have a higher share of risky projects. This is evidence of moral hazard particularly among small banks.

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European Deposit Insurance Scheme implementation: pros and cons

Banks and Bank Systems ◽

10.21511/bbs.16(1).2021.11 ◽

2021 ◽

Vol 16 (1) ◽

pp. 116-126

Author(s):

Polina Kuznichenko ◽

Serhiy Frolov ◽

Volodymyr Orlov ◽

Oleksii Boiko

Keyword(s):

Moral Hazard ◽

Deposit Insurance ◽

Economic Indicators ◽

Banking Union ◽

Economic Crises ◽

Insurance Scheme ◽

Cross Border ◽

Pros And Cons ◽

The Stability ◽

Main Barrier

The creation of deposit insurance systems in world practice has become a tool for solving problems of maintaining the stability of banking systems, increasing customer confidence in banks and other credit institutions, and preventing cases of mass withdrawal of deposits during economic crises. The paper aims to examine why such an important pillar of the banking union as the European Deposit Insurance Scheme (EDIS) has not yet been implemented. The deadlock in the EDIS negotiations is unprecedented, and the likelihood that the agreement towards this pillar will be reached is rather low. The main reason for its blocking is the existing differences of interests between the main actors, and as a consequence, it makes the progress towards the completion of this process impossible. This study attempts to structure these interests, and it seems that the necessary tool to help bring them together is the concept of moral hazard. The results obtained confirmed the hypothesis that the main barrier for EDIS introduction is the severe difference of interest between countries that can be potentially major contributors and those that hope to benefit from that. Moreover, one of the arguments for such a delay is that cross-border subsidization leads to the problem when the country with better economic indicators pays for the debts of weaker economies as the costs should be socialized.

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Does a Deposit Insurance Scheme Induce Moral Hazard among Bankers? Evidence from an Experiment with Bankers

SSRN Electronic Journal ◽

10.2139/ssrn.3299788 ◽

2018 ◽

Author(s):

Gumilang Aryo Sahadewo ◽

Bernardinus Maria Purwanto ◽

Rimawan Pradiptyo

Keyword(s):

Moral Hazard ◽

Deposit Insurance ◽

Insurance Scheme

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Governing ‘too big to fail’ banks

Risk Governance and Control Financial Markets & Institutions ◽

10.22495/rgcv1i2art5 ◽

2011 ◽

Vol 1 (2) ◽

pp. 56-64 ◽

Cited By ~ 7

Author(s):

Andy Mullineux

Keyword(s):

Corporate Governance ◽

Moral Hazard ◽

Parallel Mechanism ◽

Deposit Insurance ◽

Current Level ◽

Too Big To Fail ◽

Insurance Scheme ◽

Ex Post ◽

The Us ◽

The Uk

This paper considers possible and proposed responses to the “To Big (complex, interconnected, important) To Fail (TBTF) Problem”. It argues that the corporate governance of large shareholder owned deposit taking banks is particularly problematic because of the implicit insurance their shareholders and bondholders enjoy, at the taxpayers expense. This creates issues of moral hazard and also competitive inequality, because TBTF banks can raise funds more cheaply than non-TBTF banks. The US pre-funded deposit insurance scheme with risk-related premia does a pretty good job managing the moral hazard issues relating to non-TBTF banks. A parallel mechanism involving a special resolution regime for TBTF banks and the equivalent of deposit insurance with risk-related premia needs to be put in place. Whether the scheme should be pre-funded or operated on a ex post „polluter pays‟ basis, and the associated tax regime for TBTF banks needs further consideration. Bondholders should not enjoy the current level of protection and „Co-Co‟ bonds may be part of the solution. Consumer Protection is a good idea and deposit taking banks should be regulated as other „utilities‟ are in the UK. The corporate governance problem would be simpler if all retail deposit taking banks were mutuals

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EU Financial Crisis Management and Containment

European Cross-Border Banking and Banking Supervision ◽

10.1093/oso/9780198844754.003.0008 ◽

2020 ◽

pp. 199-236 ◽

Cited By ~ 1

Author(s):

Dalvinder Singh

Keyword(s):

Financial Crisis ◽

Moral Hazard ◽

Crisis Management ◽

Deposit Insurance ◽

National Level ◽

Bank Risk ◽

Banking Union ◽

Insurance Scheme ◽

Member States

This concluding chapter explores the decentralized and centralized mechanisms to support financial crisis management. The decentralized mechanisms reside at the national level. Meanwhile, the centralized mechanisms reside at the Eurozone level for participating and Eurozone Member States. The chapter first addresses the role of national powers to provide assistance through recapitalization initiatives and/or liquidity assistance. It then examines the formal centralized mechanisms to fund resolution as well as the proposal for the European Deposit Insurance Scheme (EDIS). The EDIS is critical to the success of the Banking Union, especially if liquidation is the option of first resort. Indeed, the EDIS and the Single Resolution Fund (SRF) are considered as principal measures to address home and host dilemmas. The funding of these initiatives through private means is an important contributing factor. It is an important step to minimize moral hazard risks through levies calibrated according to bank risk.

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