Deposit Insurance, Bank Regulation and Interest Rates: Some International Evidence
University of Aarhus - Aarhus School of Business - Department of Business Studies
University of Canterbury - Economics and Finance
Roger D. Stover
Iowa State University - Department of Accounting and Finance
Interest rate and institutional data from thirteen OECD countries are used to test whether depositors view the provision of deposit insurance and restrictions on permissible bank activities as risk-increasing or -decreasing. On average, the deposit risk premium is 25 basis points lower in countries with explicit insurance schemes, consistent with the risk reduction hypothesis. This result is robust with respect to possible specification error and is reinforced by allowance for differences in the provision of implicit insurance coverage. However, this relationship is not monotonic, with deposit premium differences in the group of insured countries being weakly consistent with a moral hazard effect. Finally, the risk premium is generally lower in countries which restrict the ability of banks to offer underwriting activities or participate in the equity of loan clients.
JEL Classification: G15, G21, G28working papers series
Date posted: August 26, 1999
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