Deposit Insurance Coverage, Ownership, and Banks' Risk-Taking in Emerging Markets

45 Pages Posted: 16 Jun 2008 Last revised: 17 Feb 2010

See all articles by Apanard Penny Prabha

Apanard Penny Prabha

University of Illinois at Springfield

Clas Wihlborg

Chapman University; University West

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.

Keywords: Deposit Insurance, Non-performing Loans, Market Discipline, Bank Ownership, Bank Governance

JEL Classification: G21, G28, G32

Suggested Citation

Prabha, Apanard Penny and Wihlborg, Clas, Deposit Insurance Coverage, Ownership, and Banks' Risk-Taking in Emerging Markets. Journal of International Money and Finance, Vol. 29, No. 2, pp. 201-386, March 2010, Available at SSRN: https://ssrn.com/abstract=1144855

Apanard Penny Prabha

University of Illinois at Springfield ( email )

Springfield, IL 62703
United States

Clas Wihlborg (Contact Author)

Chapman University ( email )

333 N. Glassell
Orange, CA 92866
United States
+17147447630 (Phone)

University West ( email )

Trollhättan, 46186
Sweden

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