repudiation risk and restitution costs toward understanding premiums on insured deposits this paper contains a theoretical development of the relationship of cd premiums to both the risks of the cd issuer and the third party government guarantor of those deposits the theoretical development shows that the risk of the guarantor derives from the possibility that the guarantee could be repudiated and or the restitution of the depositor s claim could be costly the empirical analysis of the premiums for insured cds indicates that during the years preceding the ultimate collapse of the fslic the market priced the risk of both the guarantor as well as the firm the guarantor risk pricing was responsive to the insolvency of the guarantor the attempts to recapitalize the guarantor and the efforts to resolve the insolvent thrifts during this eventful time period cd premiums rose to 187 basis points and averaged 79 and 54 basis points copyright 1994 by ohio state university press

deposit insurance and external finance i introduction capital markets serve an essential purpose in the growth and development of modern economies they provide for the efficient channeling of funds from savers to investors there are two basic methods for financing capital investment primary issuance of equity or bonds and securing of bank loans looking around the world we see that countries differ substantially in the relative importance of banks and capital markets in providing investment financing equity market capitalization currently ranges from close to zero in countries like austria argentina and greece to nearly two times gross domestic product gdp in the united kingdom south africa and malaysia the importance of bank loan financing is essentially the mirror image of this what accounts for the cross country differences in the importance of banks and capital market financing of investment the purpose of this article is to address this question directly we contend that much of the variation across countries in the depth and breadth of capital markets can be explained by a combination of the existence of deposit insurance and the extent to which a country s banking system is state owned because of the importance of financial intermediation and the difficulties associated with potential bank failures governments in most countries have established a set of institutional structures to ensure the stability of their banking systems primary among these is the creation of deposit insurance by insuring deposits banks liability holders are significantly less likely to request the return of callable deposits reducing the chances of bank runs but at the same time deposit insurance subsidizes bank risk taking activities and allows the payment of lower interest rates to depositors 1 this channels money through banks and away from financial markets direct state bank ownership has a similar impact see barth et al 2001 la porta et al 2000 we present a simple three sector model in which the economy is composed of firms banks and households the firms require operating capital and can obtain it either through equity issuance or from bank loans banks take deposits from households and make loans to firms while households both allocate their wealth and purchase the firms output the model allows us to show how increases in deposit insurance or the percentage of the banking system that is state owned both reduces the size of the capital market and shrinks the amount of bank credit to the private sector and may decrease the number of firms seeking equity financing to examine the predictions of the model we study a data set composed of 49 countries of these 33 currently have explicit deposit insurance and 42 have some state ownership of banks ranging from less than 2 to almost 90 the data confirm the predictions of the model an increase in either state bank ownership or presence of deposit insurance both decreases the size of capital markets and the extent of bank lending for example we would predict that decreasing the percentage of the banking system that is state owned from 36 as it is in italy to zero would increase in the size of the capital market from less than 10 to over 30 of gdp and a raise in the level of bank lending from 57 to close to 90 of gdp our conclusions are in contrast with those in la porta et al 1997 who study the relationship between law and finance la porta et al note the importance of the countries legal system in determining the structure of the financial system in particular they point out that investors provide capital to firms only if they believe they will get their money back for equity holders this means that they must be able to vote out directors and managers who do not pay them for creditors and holders of bonds this means that they must have authority to repossess collateral furthermore these nominal legal rights must be accompanied by confidence that the laws will be enforced

does deposit insurance retard the development of non bank financial markets whether and how the introduction of deposit insurance affects non bank financial market development depends on whether banks and non bank financial markets are substitutes or complements and theory has conflicting views using data on 134 countries over a 28 year period and several identification strategies we find that the introduction of deposit insurance retards the equity market the non bank depositaries sector and the banking sector when law and order is weak while strong law and order mitigates this effect it does not lead to a positive outcome for all markets for non bank financial markets the effect is greater in the long run so that while deposit insurance increases banking sector development in the long run it retards non bank financial markets regardless of the level of law and order finally several design features exacerbate the negative outcomes our results have important policy implications for implementing or altering deposit insurance schemes

what is the effect of unconventional monetary policy on bank performance this paper examines the relationship between unconventional monetary policy and the us banking performance unconventional monetary policy is captured through the central bank s assets and excess reserves results show that unconventional monetary policy has a negative relationship with bank performance further analysis shows that the negative association between unconventional monetary policy and performance is mitigated for banks with a high level of asset diversification and low deposit funding we also find that the negative relationship between unconventional monetary policy and performance subdues for deposit insured financial institutions finally we use dynamic panel threshold analysis which reveals that the negative association between unconventional monetary policy and bank performance is particularly pronounced above the reported threshold value

to stay or go consumer bank switching behaviour after government interventions abstract we analyse whether and how individual savings and current account holders respond to government interventions due to the financial crisis at banks we employ a difference in difference analysis and distinguish between a nationalisation and a capital injection we show that current account holders of the nationalised bank are more likely to switch away shortly after the bail out second we find heterogeneity in consumer responses to government interventions depending on the type of intervention and banking product consumers who trust the government are less likely to switch their current account from a nationalised bank furthermore risk averse current account holders at a bank that received a capital injection are more likely to switch which suggests the presence of a wake up call effect finally we report that financial literate current account holders are more likely to switch away after a nationalisation and financial literate savings account holders are more likely to switch away from the recapitalised bank the latter finding also indicates that risk awareness increased

pricing risk adjusted deposit insurance an option based model this paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships betweeen equity and a call option and insurance and a put option the data utilizes the market value of equity to solve for the asset value and its volatility market perceptions of fdic bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification thus facilitating allocation of aggregate premium across banks while economists have long argued in favor of risk adjusted deposit insurance as both more equitable and more efficient than the current system of flatrate premiums various recent developments have further contributed to an increasing dissatisfaction with the current system first both the banking industry and the government seem to be tending to the view that deregulation of the banking industry would be necessary in order to meet more sophisticated future demands on the industry as well as desirable as a policy means of stimulating greater competition among banks moreover a sudden rise in the incidence of bank failures 1 and the vulnerability of the u s banks to the socalled international debt crisis have served to bring to the fore concern about the health of the banking industry in the absence of deposit insurance riskier banks will be able to attract deposits only at higher rates and these higher costs of funding serve as built in market regulated incentives to limit excessive risk taking by banks as introduction of deposit insurance makes deposits equally risk free across banks these incentives disappear and regulation and close supervision of the banking industry must necessarily replace them as deterrents to excessive risk taking thus when insurance is offered at a flat premium regulation is designed to ensure that the risk posed to the insurer both asset and financial risk is appropriately uniform

the use of blanket guarantees in banking crises policymakers often use guarantees on bank liabilities to prevent or contain bank runs during systemic banking crises but their success has been debated using a sample of 42 episodes of banking crises this paper finds that blanket guarantees do help to reduce liquidity pressures on banks but only partially since they do not stem withdrawals from non residents withdrawals following the announcement of guarantees are much more pronounced for non resident liabilities than for foreign currency denominated deposits which may also be held by residents suggesting that the results on non residents are not driven by foreign currency risk but by concerns about the government s ability and commitment to honor the guarantee to non resident liability holders

cross border bank m as and risk evidence from the bond market the impact of cross border bank m as on bank risk remains an open question though geographically diversifying bank m as have the potential to reduce the risk of bank insolvency they also have the potential to increase that risk due to the increase in risk taking incentives by bank managers and stockholders following these transactions this paper empirically investigates whether cross border bank m as increase or decrease the risk of acquiring banks as captured by changes in acquirers yield spreads this paper also investigates how differences in the institutional environments between bidder and target countries affect changes in yield spreads following m a announcements the study finds that bondholders in general perceive cross border bank m as as risk increasing activities unlike domestic bank mergers specifically on average yield spreads increase by 4 13 basis points following the announcement of cross border m as this study also finds that these yield spreads are significantly affected by the differences in investor protection and deposit insurance environments between the transacting countries however the study does not find that the regulatory and supervisory environment in the home countries of the transacting parties significantly affects the changes in yield spreads the overall evidence suggests that regulators should judge the relative environment in both the home and the host countries in evaluating the associated risks of an active multinational financial institution and in setting the sufficiency of the banks reserve positions

financial contagion and depositor monitoring this paper analyzes market discipline in a many bank economy where contagion and bank runs interact we present a model with differently informed depositors where those depositors that are more informed have incentives to monitor banks investments it is shown that when banks are undercapitalized and the probability of success of the risky asset is low depositors might prefer a contract that is subject to bank runs in the interim period to a contract that allows banks to gamble with their funds and maintain their investment the results of the paper emphasize the benefits of private monitoring of banks in order to promote market discipline

an investigation of the determinants of profitability in new zealand manufacturing industries in 1986 87 the empirical investigation of the structure condust performance relationship has had to grapple with the problem that higher than usual profitability might arise from superior production efficiency or alternatively from markets subject to lower competitive pressures as such the nature of investigation has evolved over time to include the market power efficiency debate and the new industrial organisation emphasis on the joint determination of profitability and market structure the purpose of this paper is to present some new zealand evidence with a unique feature being to include a measure of firm level efficiency in a disaggregated model estimated using firm level data the results suggest both market power and efficiency play a role in determining profitability although efficiency dominates

how bank capital buffers vary across countries the influence of cost of deposits market power and bank regulation abstract this paper analyzes the bank and country determinants of capital buffers using a panel data of 1337 banks in 70 countries between 1992 and 2002 after controlling for adjustment costs and the endogeneity of explanatory variables the results show that capital buffers are positively related to the cost of deposits and bank market power although the relations vary across countries depending on regulation supervision and institutions their impact is the result of two generally opposing effects restrictions on bank activities and official supervision reduce the incentives to hold capital buffers by weakening market discipline but at the same time they promote higher capital buffers by increasing market power institutional quality has the two opposite effects better accounting disclosure and less generous deposit insurance however have a clear positive effect on capital buffers by both strengthening market discipline and making charter value better able to reduce risk taking incentives

related lending and banking development does related lending have positive or negative effects on the development of banking systems we analyze a unique cross country data set covering 74 countries from 1990 to 2007 and find that related lending on average does not have any effect on the growth of credit we do find however that there are conditional relationships related lending tends to retard the growth of banking systems when rule of law is weak whereas it tends to promote the growth of banking systems when rule of law is strong we also find that related lending appears to be associated with looting when banks are owned by non financial firms but that it does not do so when non financial firms are owned by banks our results indicate that whether related lending is positive or pernicious depends critically on the institutional context in which it takes place there is no single best policy regarding related lending these findings are robust to alternative specifications including iv regressions

do depositors punish banks for bad behavior market discipline deposit insurance and banking crises this paper empirically investigates two issues largely unexplored by the literature on market discipline we evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline we focus on the experiences of argentina chile and mexico during the 1980s and 1990s we find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates deposit insurance does not appear to diminish the extent of market discipline aggregate shocks affect deposits and interest rates during crises regardless of bank fundamentals and investors responsiveness to bank risk taking increases in the aftermath of crises

bank bonuses and bail outs this paper shows that bonus contracts may arise endogenously as a response to agency problems within banks and analyzes how compensation schemes change in reaction to anticipated bailouts if there is a risk shifting problem bailout expectations lead to steeper bonus schemes and even more risk taking if there is an effort problem the compensation scheme becomes flatter and effort decreases if both types of agency problems are present a sufficiently large increase in bailout perceptions makes it optimal for a welfare maximizing regulator to impose caps on bank bonuses in contrast raising managers liability can be counterproductive

financial crises and cross border banking new evidence the surge in cross border banking prior to global financial crises took place not only in the interbank market but also in the retail market e g between banks and their private customers abroad we utilize confidential data to estimate for the first time the effects of banking currency and twin crises on the geography of cross border deposits and loans we show that each crisis type has its own specific effects that these effects themselves lead to sustained increases in cross border banking and that they are different for cross border loans and deposits respectively

market discipline financial crisis and regulatory changes evidence from indonesian banks abstract following the 1997 1998 financial crisis indonesian banks experienced major regulatory changes including the adoption of the blanket guarantee scheme bgs in 1998 a limited guarantee lg in 2005 and changes in capital regulation in 1998 and 2001 we examine the impact of these regulatory changes on market discipline during the period 1995 2009 the price of deposits is used to measure market discipline in a dynamic panel data methodology on a sample of 104 commercial banks we find a weakening of market discipline following the introduction of the bgs the result is consistent with the deposit insurance scheme being credible in the lower capital requirement environment the adoption of lg in a recovering economy also mitigates the role of market discipline however market discipline is more pronounced in listed banks than unlisted banks and in foreign banks than domestic banks these results have important implications for banking regulation and supervision particularly during a crisis period

bank regulation risk and return evidence from the credit and sovereign debt crises in this paper we analyze whether regulation reduced risk during the credit crisis and the sovereign debt crisis for a cross section of global banks in this regard we examine distance to default laeven and levine 2008 systemic risk acharya et al 2010 idiosyncratic risk and systematic risk we employ world bank survey data on regulations to test our conjectures we find that regulatory restrictions official supervisory power capital stringency along with private monitoring can explain bank risk in both crises additionally we find that deposit insurance schemes enhance moral hazard as this encouraged banks to take on more risk and perform poorly during the sovereign debt crisis finally official supervision and private monitoring explains the returns during both crisis periods

bank runs in emerging market economies evidence from turkey s special finance houses recent banking crises in emerging market countries have renewed debates about deposit insurance because insurance erodes banks incentives to manage risks prudently some argue that its elimination would improve bank stability yet eliminating insurance could be de stabilizing if it recreates risks of self fulfilling runs this paper examines dynamics of depositor behavior during a set of runs on turkey s special finance houses an uninsured sub sector of islamic banks detailed data on withdrawals are analyzed in a vector autoregressive framework that enables us to distinguish between informational and self fulfilling elements of runs we found that both types of dynamics were at work during the runs suggesting a role for deposit insurance judiciously used in ruling out expectational problems that fuel tendencies to run

market discipline and deposit insurance reform in japan abstract on april 1 2002 the japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits this paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline i find that the reform raised the sensitivity of interest rates on deposits and that of deposit quantity to default risk in addition the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks these results suggest that the deposit insurance reform enhanced market discipline in japan i also find however that too big to fail tbtf policy became a more important determinant of interest rates and deposit allocation after the reform thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline

what types of banks profit most from fees charged a cross country examination of bank specific and country level determinants abstract the perception that banks are exploiting customers through their fee charging practices in a bid to maximize profits has fuelled widespread public interest in identifying the banks that profit most heavily from fees using hierarchical cross country regression analyses this paper seeks to answer the question what types of banks profit most from fees charged it also highlights the country level factors that influence banks ability to profit from fees charged the factors at the country level distinguish between those that relate specifically to the financial services industry and broader macroeconomic indicators the paper also identifies three channels through which national culture impacts banks ability to make high profits from fees this paper uses the most comprehensive set of explanatory variables in studies of this nature it has also extended the spatial scope of previous studies on bank fees by including data on banks from 46 developed and developing countries in light of swelling public pressure on governments to do something about bank fees ill advised measures are highlighted

an empirical test of the incentive effects of deposit insurance the case of junk bonds at savings and loan associations this paper analyzes how financial markets reacted to s l diversification into junk bonds the authors report that junk bond holdings are positively correlated with both the volatility of s l equity returns and the interest rates paid on large cds next they examine the impact of junk bonds on equity returns for poorly capitalized s ls greater risk taking increases the value of deposit insurance and should lead to higher stock returns however a well capitalized institution that increases junk bond holdings should not experience stock price gains the authors find that this is the case for the sample of s ls they studied copyright 1994 by ohio state university press

does deposit insurance increase banking system stability an empirical investigation based on evidence of 61 countries in 1980 97 the authors find that explicit deposit insurance tends to be detrimental to bank stability the more so where bank interest rates are deregulated and the institutional environment is weak the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors and where the scheme is funded and run by the government rather than the private sector

funding advantage and market discipline in the canadian banking sector we employ a comprehensive data set and a variety of methods to provide evidence on the magnitude of large banks funding advantage in canada and on the extent to which market discipline exists across different securities issued by the canadian banks

evidence of bank market discipline in subordinated debenture yields 1983 1991 we examine debenture yields over the period 1983 1991 to evaluate the market s sensitivity to bank specific risks and conclude that investors have rationally reflected changes in the government s policy toward absorbing private losses in the event of a bank failure although this evidence does not establish that market discipline can effectively control banking firms it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major u s banking firms an increasingly important issue in the regulation of financial institutions concerns the extent to which market investors can will recognize and control the risks of banking firms although the banking act of 1933 replaced some private risk bearing with federal deposit insurance legislators were reluctant to displace market discipline very extensively flood 1992 by the early 1980s however u s regulators had come to protect virtually all bank liability holders from credit losses most visibly at large banks which were deemed too big to fail sprague 1986 o hara and shaw 1990 this extension of the government safety net largely reflects a skepticism on the part of regulators that normal market forces could adequately identify and control bank risks while u s regulators have recently shown an increased willingness to let some bank investors bear default losses an official suspicion of the efficacy of market discipline remains widespread by contrast some prominent academic economists argue that market investors in bank debentures could provide timely and effective control over banking firms risk exposures and that the social cost of supervising banks would be lower if regulators ceded greater

deposit insurance banking crises and market discipline evidence from a natural experiment on deposit flows and rates published in journal of money credit and banking volume 45 issue 1 february 2013 pages 179 200 as as deposit insurance banking crises and market discipline evidence from a natural experiment on deposit flows and rates

financial intermediaries and liquidity creation trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets these securities which can arise endogenously have values that do not depend on the information known only to informed agents bank debt deposits is an example of this type of liquid security which protect relatively uninformed agents and we provide a rationale for deposit insurance in this content high grade corporate debt and government bonds are other examples implying that a money market mutual fund based payments system may be an alternative to one based on insured bank deposits

federal deposit insurance regulatory policy and optimal bank capital this paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the fdic essentially the fdic sells two products insurance and regulation to span the product space it must and does set two prices we argue that the need to establish regulatory disincentives to bank risk taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value i e the value of their right to continue in business stands at the center of these disincentives and in front of the fdic s insurance reserves just as a book shouldn t be judged by its cover a government agency shouldn t be judged by the words behind its initials with the fdic federal deposit insurance corporation the agency s name describes only part of its formal operations the fdic is quasi governmental has a regional structure and sells deposit insurance however the initials fail to convey the fdic s critical place in the governmental regulatory structure as the sole federal overseer of the approximately 8900 state chartered commercial banks that have chosen not to belong the federal reserve system reflecting the federal reserve s membership problem the number of these banks is growing year by year besides selling deposit insurance at bargain explicit rates the fdic performs four regulatory functions 1 entry regulation it passes on new banks applications for deposit insurance and on branch and merger proposals as well thereby protecting the value of existing bank charters 2 examination two thirds of fdic employees are concerned with inspecting bank records and supervising managerial activity 3 regulation of deposit rates and conditions for withdrawal by tradition fdic policies on these matters conform entirely with regulations applicable to federal reserve member banks and 4 disposition of failed banks when an insured bank fails the fdic usually chooses not to liquidate it 2

using market information in prudential bank supervision a review of the u s empirical evidence in principle market and government supervision provide alternative devices for controlling governing any type of corporation most national governments have instituted nonmarket regulatory mechanisms for banking firms on the grounds that market based mechanisms do not adequately discipline banks but what evidence supports this assessment why must governments assure bank solvency but not the solvency of other firms government oversight naturally displaces private efforts to evaluate and control financial firms moreover if the banking business changes over time as it assuredly has in the past decade or two the best combination of government and private supervision may change concurrently this paper reviews and evaluates the growing empirical literature on private investors abilities to assess the financial condition of banking firms the evidence supports the proposition that market investors and analysts could reasonably provide a greater proportion of corporate governance services for large traded u s financial firms

deposit insurance around the world in the past two decades in a series of banking crises around the world banks have become systematically insolvent these crises have occurred in developed and developing economies alike to make such financial system breakdowns less likely and to limit their costs if they occur policymakers feel the need for financial safety nets these include such policies as implicit or explicit deposit insurance a lender of last resort function of the central bank bank insolvency resolution procedures and bank regulation and supervision of these policies explicit deposit insurance has been gaining popularity in recent years since the 1980s the number of countries with explicit deposit insurance schemes almost tripled with most oecd countries and an increasing number of developing economies adopting some form of explicit depositor protection in 1994 deposit insurance became the standard for the newly created single banking market of the european union establishing an explicit deposit insurance scheme became part of the generally accepted best practice advice given to developing economies

uninsured deposits as a monitoring device their impact on bond yields of banks abstract we empirically analyze the impact of uninsured deposits on a bank s cost of public debt uninsured depositors can exert market discipline over a bank and potentially reduce its agency cost of debt through informed monitoring we use a sample of public bond issues by u s bank holding companies from 1994 to 2013 and find statistically strong evidence that banks with more uninsured deposits relative to their assets issue bonds with a lower interest rate findings suggest a one standard deviation increase in uninsured deposits is associated with a 46 64 basis point decrease in bond yield in addition we find that bonds issued by banks with higher default risk or lower reputation benefit more from uninsured savers our paper contributes to the literature that explores market discipline and provides evidence that banks can benefit from it through a lower borrowing cost

deposit insurance and risk taking we review the theory of deposit insurance highlighting the underlying assumptions that were not satisfied during the recent financial crisis and that may have led to serious policy mistakes in theoretical models deposit insurance is mostly seen as an equilibrium selection device to avoid panic based runs in such a context it is not drawn on and is thus costless and fully credible however if bank runs are linked to a fall in asset values providing deposit insurance can be very costly and as the case of ireland has shown can even threaten sovereign solvency this perspective indicates a need for new research on the relation between bank failures deposit insurance schemes sovereign default and currency depreciation and for reforms of deposit insurance schemes copyright 2011 oxford university press

moral hazard optimal unemployment insurance and experience rating abstract this paper is concerned with evaluating alternative unemployment insurance ui schemes in a dynamic economy with moral hazard we consider changes in the size and duration of ui benefits and the effects of experience rating and use a dynamic contracting approach to determine a benchmark optimal allocation radical changes in the current ui system increase welfare but not by much a move to full experience rating has distributional effects but the aggregate effects are negligible

on the rationale of bank lending in pre crisis thailand evidence from credit files is provided to examine bank lending determinants of thai commercial banks their lending practice follows reasonable patterns as a standard set of variables including indirect risk variables explains much of the variance in interest rate spread reflecting institutional differences with mature markets we find a higher importance of relationship banking and risk control via credit availability information about later default reveals prudent relationship lending however banks could have made better use of available information about borrowers riskiness these findings do not support a general verdict of bad banking but indicate room to improve lending decisions

the effect of bank ownership and deposit insurance on monetary policy transmission abstract in this paper we develop a theoretical model with a representative bank whose ownership is shared between state and private sector the bank faces a risk of failure and provides private and public explicit deposit insurance banks owned to a larger extent by the government are more able to counteract a restrictive monetary policy because of their capacity to raise additional volume of deposits therefore the greater the state s share in the bank ownership the less the impact of a monetary tightening on the level of loan supply

monetary policy under dual exchange rates abstract this paper finds that the introduction of dual exchange rates gives the monetary authority greater independence from external constraints than it would otherwise enjoy the monetary authority is able to influence the level of aggregate demand in the short run and to sterilize the effects of temporary foreign disturbances in addition the paper finds that dual rates insulate the domestic economy fully from foreign interest rate changes but do not provide insulation from speculative disturbances

deposit insurance and subsidized recapitalizations the 2007 2009 financial crisis saw a vast expansion in deposit insurance guarantees around the world and yet our understanding of the design and consequences of deposit insurance schemes is in its infancy we provide a new rationale for the provision of deposit insurance in our model the banking sector exhibits both adverse selection and moral hazard which implies that the social benefits of bank monitoring must for incentive reasons be shared between depositors and banks consequently socially too few deposits are made in equilibrium deposit insurance or equivalently bank recapitalization corrects this market failure we find that deposit insurance should be funded not by banks or depositors but out of general taxation the optimal level of deposit insurance varies inversely with the quality of the banking system hence when the soundness of the financial sector is uncertain governments should consider supporting deposit insurance schemes and undertaking subsidized recapitalizations

market discipline and bank subordinated debt note a lengthy literature in banking has addressed the question of whether the market prices of liabilities respond to individual bank risk taking activity that is whether any market disciplines exists however despite the obvious importance of this question the current record has led to no consensus on the issue results have been contradictory in this journal alone hannan and hanweck 1988 conclude that the market does extract at least some price for risk taking while avery belton and goldberg 1988 find no such evidence in this study we argue that this line of inquiry has a serious f law in that it fails to use theoretical models of bank instrument valuation to determine the appropriate testing of market discipline therefore the empirical models have lacked the necessary exactness to isolate the appropriate null hypotheses to redress this shortcoming and advance the methodology of this area of the literature we use a pricing model which comes to the banking area from the options pricing literature to look at the yield spread on bank liabilities using this model it is clear that the value of large uninsured bank liabilities cannot be described as a linear monotonic function of risk moreover current bank regulation affects the assumed role risk measures play in the pricing of such debt instruments both of these complications mean that simple regressions are not likely to adequately address the relationship between the value of debt and underlying risk in the final section we empirically investigate the presence of market discipline using contingent claims pricing we find that accounting measures of bank risk still have little predictive value in explaining yield spreads and therefore offer little evidence of meaningful market discipline

market discipline by thrift depositors this paper tests for the presence of depositor discipline by examining the effect of depository institutions risk on the pricing and growth of uninsured deposits the study analyzes a large panel of thrifts that includes detailed information on interest rate schedules this information allows the authors to develop a time consistent risk profile for thrifts their empirical findings support the presence of market discipline riskier banks are found to pay higher interest rates but attract smaller amounts of uninsured deposits the authors also find that qualitative results are similar for fully insured deposits although statistical significance is substantially lower

does the debt market assess large banks risk time series evidence from money center cds abstract uninsured bank liabilities should offer a promised yield that compensates depositors for their expected default losses however the conjectural guarantees available to large u s banking firms makes it questionable whether large depositors should or do feel themselves exposed to credit risk prior papers have evaluated the determinants of bank risk premia using cross sectional data with relatively inconclusive results this paper investigates the same issue in a methodologically independent fashion using time series data on specific banks daily offering rates during the period may 1982 through july 1988 we find that cd rates paid by large money center banks include significant default risk premia

the impact of international information disclosure requirements on market discipline abstractfinancial regulators are challenged with finding the most efficient and effective ways to monitor banks given an expanding and complex international financial system market discipline has grown in importance as a way to discourage banks from taking on unnecessary risk one of the main drivers of market discipline is information disclosure while the literature on market discipline is expansive there are no known studies on the impact of individual information disclosure requirements on market discipline our study investigates which specific disclosure requirements influence financial investors to discipline banks and which do not we find that information disclosure requirements primarily reduce or have no impact on market discipline practices

on the effects of deposit insurance and observability on bank runs an experimental study we study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment we consider three depositors in the line of a bank who decide between withdrawing or keeping their money deposited we have three treatments with different levels of deposit insurance which reflect the losses a depositor may incur in the case of a bank run we find that different levels of deposit insurance and the possibility of observing other depositors actions affect the likelihood of bank runs when decisions are not observable higher levels of deposit insurance decrease the probability of bank runs when decisions are observable this need not to be the case these results suggest that i observability might be considered as a partial substitute of deposit insurance and ii the optimal deposit insurance should take into account the degree of observability

market discipline and deposit insurance cross country evidence presented in this paper suggests that explicit deposit insurance reduces required deposit interest rates while at the same time it lowers market discipline on bank risk taking internationally deposit insurance schemes vary widely in their coverage funding and management this reflects that there are widely differing views on how deposit insurance should optimally be structured to inform this debate we use a newly constructed data set of deposit insurance design features to examine how different design features affect deposit interest rates and market discipline

moving toward risk based deposit insurance premiums in the european union the case of spain this article provides a scenario based analysis of how the european union proposal for a new funding model for deposit insurance systems diss would affect the spanish banking sector we examine the risk profiles of commercial banks savings banks and credit cooperatives over the period 2007 to 2011 and compare the contributions to the deposit insurance fund dif under the current flat rate regime with those that would have occurred under the new risk sensitive system we find that a risk based scheme could provide an incentive for sound management by reducing the premiums for credit institutions with better risk profiles we also conclude that the proposed reform may help to mitigate the moral hazard associated with larger credit institutions

banking on the boom tripped by the bust banks and the world war i agricultural price shock bank lending booms and asset price booms are often intertwined although a fundamental shock might trigger an asset boom aggressive lending can push asset prices higher leading to more lending and so on such a dynamic seems to have characterized the agricultural land boom surrounding world war i this paper examines i how banks responded to the asset price boom and how they were affected by the bust ii how various banking regulations and policies influenced those effects and iii how bank lending contributed to rising farm land values in the boom and how bank closures contributed to falling prices in the bust we find that rising crop prices encouraged bank entry and balance sheet expansion in agriculture counties state deposit insurance systems amplified the impact of rising crop prices on the size and risk of bank portfolios while higher minimum capital requirements dampened the effects further increases in county farm land values and mortgage debt were correlated with the number of local banks ex ante and increases in bank loans during the boom when farm land prices collapsed banks that had responded most aggressively to the asset boom had a higher probability of closing while counties with more bank closures experienced larger declines in land prices than can be explained by falling crop prices alone

crises and confidence systemic banking crises and depositor behavior abstract we show that individuals who have experienced a systemic banking crisis are 11 percentage points less likely to use banks in the u s than otherwise similar individuals who emigrated from the same country but did not live through a crisis this finding is robust to controlling for exposure to other macroeconomic events and to various methods for addressing potential bias due to migrant self selection consistent with the view that personal experience plays an important role in decision making the effects are larger for individuals who were older and more likely to have had wealth entrusted to the banking system at the time of the crisis and for people who experienced crises in countries without deposit insurance

sovereign risk and deposit dynamics evidence from europe abstractthe unprecedented expansion of sovereign balance sheets since the beginning of the global crisis has given a new meaning to the term sovereign risk developments in europe since early 2010 revealed new challenges for the functioning of private banks in an environment of heightened sovereign risk and may have contributed to deleveraging the article uses an innovative way of measuring the perception of sovereign risk and its impact using an extension of a common market discipline framework it shows that exposure to sovereign risk may have limited the ability of banks in europe to collect deposits potential identification issues between deposits and bank efficiency are controlled by using data envelopment analysis dea the results are robust to inclusion of conventional measures of bank performance and the sector wide holdings of foreign sovereign debt

does deposit insurance improve financial intermediation evidence from the russian experiment this study examines how the introduction of deposit insurance affects depositors and banks using the deposit insurance scheme introduced into the russian banking system as a natural experiment the fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit taking and decreased reliance upon state owned banks as custodians of retail deposits we find that banks entering the new deposit insurance system increase both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that do not enter the new deposit insurance system these results hold up in a multivariate panel data analysis that controls for bank and time random effects the longer a bank has been entered into the deposit insurance system the greater is its level of deposits and its ratio of deposits to assets moreover this effect is stronger for regional banks and for smaller banks we also find that implementation of the new deposit insurance system has the effect of leveling the playing field between state owned banks and privately owned banks finally we find strong evidence of moral hazard following implementation of deposit insurance in the form of increased bank risk taking financial risk and to a lesser degree operating risk increase following implementation

the risk of financial crises is there a role for income inequality abstract could macroeconomic factors such as income inequality be the real root cause of financial crises we explore a broad variety of financial and macroeconomic variables and employ a general to specific model selection process to find the most reliable predictors of financial crises in developed countries over a period of more than 100 years our in sample results indicate that income inequality has predictive power beyond loan growth and several other financial variables out of sample forecasts for individual predictors show that their predictive power tends to vary considerably over time but income inequality has predictive power in each forecasting period

deposit insurance and international bank liabilities abstract this paper examines the responsiveness of external bank liabilities to deposit insurance policies for a sample of developed countries external bank liabilities held by non banks are found to increase after the introduction of explicit deposit insurance deposit insurance schemes tend to exclude interbank deposits from coverage and the response of external interbank liabilities to deposit insurance appears to be varied neither external non bank nor external interbank liabilities are found to be materially affected by deposit insurance design this suggests that international competition in the area of deposit insurance design as possible under the eu deposit insurance directive of 1994 would be fruitless

ownership structure market discipline and banks risk taking incentives under deposit insurance the paper studies the effects of market discipline by creditors and ownership structure on banks risk taking in the presence of partial deposit insurance an agency cost model explains how the effects of creditor discipline and shareholder control arc interdependent the non monotonic effect of shareholder control and the role of leverage panel regressions on several hundred banks worldwide 1995 2005 confirm a negative individual risk effect of creditor discipline and the expected convex effect of shareholder control increased shareholder control significantly strengthens the negative effect of market discipline on asset risk but joint effects on overall default risk are limited c 2011 elsevier b v all rights reserved

deposit insurance and depositor discipline direct evidence on bank switching behaviour in japan as japan s financial system becomes more market oriented depositor discipline is playing a larger role in the monitoring of banks matching household survey data with banks financial data we examine households response to bank risk and different deposit insurance schemes we find that bank switching in response to risk increased between 1996 and 2001 and households choice of bank adequately reflects banks financial health we also examine the determinants of households knowledge of the deposit insurance scheme and how this affects switching behaviour the results suggest that depositor discipline works and could play an important supplementary role in bank monitoring