The Effect of Deposit Insurance on Risk Taking in Asian Banks

Enerelt Enkhbold, Batnairamdal Otgonshar

Abstract


This paper uses a panel database of 401 banks in 31 Asian countries over the period from 2000 to 2010 to examine the effects of deposit insurance on banks’ risk-taking incentives. We find that risk-taking incentives vary with bank size and risks. In addition, differentiated premiums may not accurately reflect the level of risk that a bank poses. In the presence of a deposit insurance scheme, the pattern of the non-linear relationship between bank size and risk-taking significantly changes. Our results suggest that market discipline exercised by banks is stronger in the presence of mandatory deposit insurance scheme. Government-funded deposit insurance funds allow Asian banks to take a higher risk. A risk-based deposit insurance scheme functions more effectively in the countries with good regulatory framework and institutional quality.


Full Text:

PDF


DOI: http://dx.doi.org/10.5296/ajfa.v5i1.3023

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.

To make sure that you can receive messages from us, please add the 'macrothink.org' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.

Copyright © Macrothink Institute   ISSN 1946-052X