Essay Example on There are number of literature that empirically Analyzed

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There are number of literature that empirically analyzed the impact of deposit insurance system on banking risk taking activities Study that conducted by Demirguc Kunt A Detragiache E 1999 carried out on large sample of panel data on 61 countries over the period 1980 1997 The authors determined that explicit deposit insurance might be harmful to bank stability especially for those countries with weak institutional regulation however more effective regulation better offset the adverse incentives created by deposit insurance such as moral hazard Gropp and Vesala 2004 investigated the relationship between deposit insurance bank charter values debt holder monitoring and banks risk taking for 128 banks from 15 EU countries during 1992 1998 The research found that the introduction of explicit deposit insurance can considerably decrease banks risk taking the risk taking of banks with a very large share in the banking system showed no effects also after the introduction of explicit deposit insurance some changes in the balance sheet structure of banks towards more insured deposits were observed Angkinand and Wihlborg 2010 based on banking system data from the IMF s Financial Stability reports for sample of 52 countries 14 industrial 32 emerging market 6 developing countries analyzed the relationship of deposit insurance banks ownership state or foreign bank s shareholder and creditor protection and their impact on the coverage of explicit deposit insurance systems that reduces risk taking of banks 



The study revealed that total outcome of explicit deposit insurance coverage on bank's risk taking in countries with higher quality of governance can be described as a U shaped curve for shareholder rights and state ownership The authors according to the obtained results concluded that increasing shareholder rights allow countries to reduce the deposit insurance coverage while the coverage should be relatively high in countries with substantial foreign ownership of banks p 28 Following research papers were directed to investigate the relationship between deposit insurance and bank s risk taking for the Russian banks Chernykh L Cole R A 2011 studied the impact of deposit insurance system introduction which were established in 2004 on depositors and banks in the form of increased deposit taking and reduced dependence upon State owned banks they also tested for the moral hazard in the form of increased banks risk taking based on the publicly available data on banks from Central Bank of Russia and the Deposit Insurance Agency of Russia for the sample period from February 1 2014 to December 1 2016 on monthly basis

The results showed that membership in the deposit insurance system raised the level of retail deposits and ratios of retail deposits to total assets comparative to banks that did not members of DIS Furthermore authors find solid confirmation that implementation of deposit insurance increased moral hazard in the form of financial risk the ratio of bank equity to assets Another research by Gorelaya N V 2015 empirically analyzed how deposit insurance systems affect the degree of market discipline on bank's risk taking on the basis of panel dataset on 148 Russian banks state owned and small private banks on quarterly basis for the period from the 1st quarter of 2007 to the 3rd quarter of 2014 and different variables to assess banking risks Mainly the author hypothesized about the existence of a quadratic relationship between the indicator responsible for the risks of domestic banks and the amount of insurance coverage also that the larger the member bank the more risks it accepts The results of the study confirmed the proposed hypothesis following Angkinand and Wihlborg 2010 of a quadratic relationship between the amount of insurance coverage and the level of banks risks taking and denied the hypothesis that the large member banks tend to take the more risks 



In addition the author s findings show a positive correlation between the risks taken by banks and the macroeconomic indicators the real GDP growth rate the real interest rate and the dummy variable indicating the presence or absence of a crisis in the economy Yagcılar G G 2014 examined the effects of deposit insurance on banks risk taking of 26 banks in Turkey during 2002 2013 Four risk factors were considered in the research paper non performing loans total loans ratio proxy of credit risk liquid assets short term liabilities ratio proxy of liquidity risk interest rate sensitivity of balance sheet and off balance sheet position total capital ratio proxy of interest rate risk overall default risk equity to total assets plus net profit over average total assets ROAA standard deviation of ROAA Z score As a proxy of explicit deposit insurance insured deposits total deposits ratio was measured The study found that credit risk and interest rate risk are positively affected from deposit insurance Conversely liquidity and overall default risk were minimized as a result of deposit insurance

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