Institutions and Deposit Insurance: Empirical Evidence

Journal of Financial Services Research, Forthcoming

39 Pages Posted: 29 Jul 2014 Last revised: 19 Jun 2020

See all articles by Kathryn L. Dewenter

Kathryn L. Dewenter

University of Washington - Michael G. Foster School of Business

Alan C. Hess

University of Washington - Michael G. Foster School of Business

Jonathan Brogaard

University of Utah - David Eccles School of Business

Date Written: February 1, 2017

Abstract

Do banks’ responses to changes in deposit insurance vary across countries even if the countries have comparable institutions? If so, by how much? Using data on the financial performance of large banks in 15 financially and economically developed countries, we find that where deposit insurance has an effect, it is large and varies depending on the level of economic freedom, rule of law and corruption in the bank’s home country. As in prior papers, we show that during stable economic periods, increases in deposit insurance are associated with higher bank risk, both problem loans and leverage. In most, but not all cases, stronger institutions temper these effects. The institutions’ effects are substantial. For example, average changes in the Rule of Law double the impact of a change in deposit insurance on bank leverage. We contribute to the substantial literature in this area by showing that the institutional effects are significant even across a set of countries with comparable institutions; by conducting a careful calibration of the economic significance of the effects; by providing evidence that during stable periods changes in deposit insurance only affect bank risk and not other measures of performance; and finally by showing that the effects of both deposit insurance and institutions vary across stable and crisis economic periods. The stable period results are consistent with the moral hazard effects of deposit insurance, while the crisis period results are consistent with endogeneity concerns that poor bank performance could drive changes in regulations.

Keywords: Banking, Regulation, Deposit Insurance, Franchise or Charter Value

JEL Classification: G21, G28

Suggested Citation

Dewenter, Kathryn L. and Hess, Alan C. and Brogaard, Jonathan, Institutions and Deposit Insurance: Empirical Evidence (February 1, 2017). Journal of Financial Services Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2472618 or http://dx.doi.org/10.2139/ssrn.2472618

Kathryn L. Dewenter (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Dept. of Finance & Business Economics
Seattle, WA 98195-3200
United States
206-685-7893 (Phone)
206-685-9392 (Fax)

Alan C. Hess

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543 4579 (Phone)
206-543-6809 (Fax)

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

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