EFFECTS OF DEPOSIT INSURANCE SYSTEM ON BANKS’ RISK TAKING INCENTIVES IN TURKEY

Gamze Gocmen Yagcilar

EFFECTS OF DEPOSIT INSURANCE SYSTEM ON BANKS’ RISK TAKING INCENTIVES IN TURKEY

Year 2014, Volume: 3 Issue: 4, 0 - 0, 08.11.2015

Abstract

Deposit insurance is an insurance system that guarantees bank deposits of people in case of bank failure or a run on the bank. Deposit insurance in Turkey is handled by Savings Deposit Fund Insurance and according to the latest regulations compensation limit covers a maximum of 100,000 TL per depositor per member institution. The system is adopted in most countries and has various advantages for both individuals and banks. However academic debates commonly focus on whether this system encourages banks to take excessive risks. In this context the purpose of this study is to analyze the link between deposit insurance and banks’ risk taking. For this purpose, a panel regression analysis is applied to the ratio of deposits under insurance to total deposits and basic risk measures of banks operating in Turkey during 2002Q4-2013Q1. Results suggest that, higher insured deposit ratios are related to higher credit risk and interest rate risk but lower liquidity risk and overall default risk.

Keywords

Deposit insurance, banks’ risk taking, panel data regression

References

Abdullah, S.A.S. and R. Ahmad, (2012), “Deposit Insurance System: An Exposition
for the Islamic Banks in Malaysia”, International Journal of Social Sciences and
Humanity Studies, Vol. 4, No. 2, pp. 427-439. 
Angkinand, Apanard, C. and Wihlborg, (2010), “Deposit Insurance Coverage,
Ownership and Banks’ Risk Taking in Emerging Markets”, Journal of International
Money and Finance, Vol. 29, 252-274. 
Anginer, D, Demirgüç-Kunt, A. and Zhu, M. (2014), “How Does Deposit Insurance
Affect Bank Risk? Evidence from the Recent Crisis”, Journal of Banking and
Finance, http://dx.doi.org/10.1016/j.jbankfin.2013.09.013. 
Aydin, N., Başar M. and Coşkun, M., (2006), Bankacılık Uygulamaları, Anadolu
Üniversitesi Ya. No. 1711, Eskişehir. 
Bartholdy, Jan, Glenn W. Boyle and R.D. Stover, (2003), “Deposit Insurance and
the Risk Premium in Bank Deposit Rates”, Journal of Banking and Finance, Vol. 27, 699-717. 
Batisse, C., (2001), “Externalities and Local Growth: A Panel Data Analysis Applied
to Chinese Provinces”, International Conference of the Chinese Economy, Has
China Become a Market Economy?, May 17-18 2001, France. 
Beck, T., (2008), “Bank Competition and Financial Stability: Friends or Foes?”,
World Bank Policy Reseach Working Paper, No. 4656, pp. 1-30. 
Bossone, B., (2000), “What Makes Banks Special? A Study of Banking, Finance and
Economic Development”, World Bank Working Papers, No. 2408, pp.1-66. 
Boyd, J.H and De Nicola, G, (2008), “The Theory of Bank Risk Taking and
Competition Revisited”, the Journal of Finance, Vol. 60, No. 3, 1329-1343.
Buttonwood’s Notebook, “Eurozone Crisis: What Does a Guarantee Mean?”, The
Economist, Mar 19th, 2013,
www.economist.com/blogs/buttonwood/2013/03/euro-zone-crisis-1 
Carapella, F. and G. Di Giorgio, (2004), “Deposit Insurance, Institutions and Bank
Interest Rates”, Transition Studies Review, Vol. 11, no. 3, 77-92. 
DeLong, G. and Sauncers, A. (2011), “Did The Introduction Of Fixed-Rate Federal
Deposit Insurance Increase Long-Term Bank Risk-Taking?”, Journal of Financial
Stability, Vol. 7, pp. 19-25. 
Demirgüç-Kunt, A. and E. Detragiache, (1999), “Does Deposit Insurance Increase
Banking System Stability? An Empirical Investigation”, World Bank Policy
Research Working Paper, No. 2247. 
Diamond, D.W. and P.H. Dybvig, (1983), “Bank Runs, Deposit Insurance and
Liquidity”, Journal of Political Economy, Vol. 91, No. 3, pp. 401-419. 
Enkhbold, E. and Otgonshar, B., (2013), “The Effect of Deposit Insurance on Risk
Taking in Asian Banks”, Asian Journal of Finance & Accounting, Vol. 5, No. 1, pp. 104-126.
Gonzalez, F., (2005), “Bank Regulation and Risk-Taking Incentives: An
International Comparison of Bank Risk”, Journal of Banking & Finance, Vol. 29, pp. 1153-1184. 
Gropp, R. and Vesela, J. (2004), “Deposit Insurance, Moral Hazard and Market
Monitoring”, European Central Bank, Working Paper Series, No. 302. 
Gueyie, J.P. and Lai, V.S. (2003), “ Bank Moral Hazard and the Introduction of
Official Deposit Insurance in Canada”, International Review of Economics and
Finance, Vol. 12, pp. 247-273. 
Huang, D.F. (2005), “The Predictive Power of Capital Adequacy Ratios on Bank
Risk”, Journal of Contemporary Accounting, Vol. 6, no. 1, pp. 1-22,
http://www2.tku.edu.tw/~tmax/file/account_72/v6n1-1.pdf. 
Ioannidou, V.P. and Penas, M.F. (2010), “Deposit Insurance and Bank Risk Taking:
Evidence from Internal Loan Ratings”, Journal of Financial Intermediation, Vol. 19, 95-115. 
Keeley, M.C., (1990), “Deposit Insurance, Risk and Market Power in Banking”, The
American Economic Review, Vol. 80, No. 5, 1183-1200.
Le, M. (2013), “Deposit Insurance Adoption and Bank Risk-Taking: the Role of
Leverage”, Paris School of Economics, Working Papers, No. 2013-41. 
Leaven, L. (2002), “Bank Risk and Deposit Insurance”, The World Bank Economic
Review, Vol. 16, No. 1, pp. 109-137. 
Leaven, L. and Levine, R. (2008), “Bank Governance, Regulation and Risk Taking”,
NBER Working Paper Series, No: 14113. 
Ng, T.H., Lim, Y.S. and Tan N. L., (2010), “Deposit Insurance and Bank Risks: The
Case of Malaysia”, European Journal of Economics, Finance and Administrative
Sciences, Issue 18, 19-27.
Ninimaki, J-P. (2000), “The Effects of Competition on Banks’ Risk Taking with and
without Deposit Insurance”, Bank of Finland Discussion Papers, No. 21. 
Pennacchi, G. (2006), “Deposit Insurance, Bank Regulation and financial System
Risks”, Journal of Monetary Economics, Vol. 53, pp. 1-30. 
Silva, N. (2008), “Deposit Insurance, Moral Hazard and The Risk of Runs”, Central
Bank of Chile Working Papers No. 478.
Şıklar, İ. (2004), Finansal Ekonomi, Anadolu Üniversitesi Ya., No. 1588, Eskişehir. 
Yoon, K.H. and Jun, Y.S. (2012), “Deposit Insurance Increase and Risk Taking by
Banks”, International Research Journal of Finance and Economics, Issue 91. 
Wheelock, D.C. and Wilson, P.W. (1994), “Can Deposit Insurance Increase the Risk
of Bank Failure? Some Historical Evidence”, Federal Reserve Bank of St.Louis
Review, Vol. 76, No. 3, May/June 1994, pp. 57-71. 
Wu, R-J, and Chi, C-P, (2006), “Competition, Deposit Insurance and Bank Risk
Taking”, http://centerforpbbefr.rutgers.edu/2006/Paper%202006/16AS02-056
Chien-Ping%20Chi.pdf.

Year 2014, Volume: 3 Issue: 4, 0 - 0, 08.11.2015

Gamze Gocmen Yagcilar

Abstract

References

Abdullah, S.A.S. and R. Ahmad, (2012), “Deposit Insurance System: An Exposition
for the Islamic Banks in Malaysia”, International Journal of Social Sciences and
Humanity Studies, Vol. 4, No. 2, pp. 427-439. 
Angkinand, Apanard, C. and Wihlborg, (2010), “Deposit Insurance Coverage,
Ownership and Banks’ Risk Taking in Emerging Markets”, Journal of International
Money and Finance, Vol. 29, 252-274. 
Anginer, D, Demirgüç-Kunt, A. and Zhu, M. (2014), “How Does Deposit Insurance
Affect Bank Risk? Evidence from the Recent Crisis”, Journal of Banking and
Finance, http://dx.doi.org/10.1016/j.jbankfin.2013.09.013. 
Aydin, N., Başar M. and Coşkun, M., (2006), Bankacılık Uygulamaları, Anadolu
Üniversitesi Ya. No. 1711, Eskişehir. 
Bartholdy, Jan, Glenn W. Boyle and R.D. Stover, (2003), “Deposit Insurance and
the Risk Premium in Bank Deposit Rates”, Journal of Banking and Finance, Vol. 27, 699-717. 
Batisse, C., (2001), “Externalities and Local Growth: A Panel Data Analysis Applied
to Chinese Provinces”, International Conference of the Chinese Economy, Has
China Become a Market Economy?, May 17-18 2001, France. 
Beck, T., (2008), “Bank Competition and Financial Stability: Friends or Foes?”,
World Bank Policy Reseach Working Paper, No. 4656, pp. 1-30. 
Bossone, B., (2000), “What Makes Banks Special? A Study of Banking, Finance and
Economic Development”, World Bank Working Papers, No. 2408, pp.1-66. 
Boyd, J.H and De Nicola, G, (2008), “The Theory of Bank Risk Taking and
Competition Revisited”, the Journal of Finance, Vol. 60, No. 3, 1329-1343.
Buttonwood’s Notebook, “Eurozone Crisis: What Does a Guarantee Mean?”, The
Economist, Mar 19th, 2013,
www.economist.com/blogs/buttonwood/2013/03/euro-zone-crisis-1 
Carapella, F. and G. Di Giorgio, (2004), “Deposit Insurance, Institutions and Bank
Interest Rates”, Transition Studies Review, Vol. 11, no. 3, 77-92. 
DeLong, G. and Sauncers, A. (2011), “Did The Introduction Of Fixed-Rate Federal
Deposit Insurance Increase Long-Term Bank Risk-Taking?”, Journal of Financial
Stability, Vol. 7, pp. 19-25. 
Demirgüç-Kunt, A. and E. Detragiache, (1999), “Does Deposit Insurance Increase
Banking System Stability? An Empirical Investigation”, World Bank Policy
Research Working Paper, No. 2247. 
Diamond, D.W. and P.H. Dybvig, (1983), “Bank Runs, Deposit Insurance and
Liquidity”, Journal of Political Economy, Vol. 91, No. 3, pp. 401-419. 
Enkhbold, E. and Otgonshar, B., (2013), “The Effect of Deposit Insurance on Risk
Taking in Asian Banks”, Asian Journal of Finance & Accounting, Vol. 5, No. 1, pp. 104-126.
Gonzalez, F., (2005), “Bank Regulation and Risk-Taking Incentives: An
International Comparison of Bank Risk”, Journal of Banking & Finance, Vol. 29, pp. 1153-1184. 
Gropp, R. and Vesela, J. (2004), “Deposit Insurance, Moral Hazard and Market
Monitoring”, European Central Bank, Working Paper Series, No. 302. 
Gueyie, J.P. and Lai, V.S. (2003), “ Bank Moral Hazard and the Introduction of
Official Deposit Insurance in Canada”, International Review of Economics and
Finance, Vol. 12, pp. 247-273. 
Huang, D.F. (2005), “The Predictive Power of Capital Adequacy Ratios on Bank
Risk”, Journal of Contemporary Accounting, Vol. 6, no. 1, pp. 1-22,
http://www2.tku.edu.tw/~tmax/file/account_72/v6n1-1.pdf. 
Ioannidou, V.P. and Penas, M.F. (2010), “Deposit Insurance and Bank Risk Taking:
Evidence from Internal Loan Ratings”, Journal of Financial Intermediation, Vol. 19, 95-115. 
Keeley, M.C., (1990), “Deposit Insurance, Risk and Market Power in Banking”, The
American Economic Review, Vol. 80, No. 5, 1183-1200.
Le, M. (2013), “Deposit Insurance Adoption and Bank Risk-Taking: the Role of
Leverage”, Paris School of Economics, Working Papers, No. 2013-41. 
Leaven, L. (2002), “Bank Risk and Deposit Insurance”, The World Bank Economic
Review, Vol. 16, No. 1, pp. 109-137. 
Leaven, L. and Levine, R. (2008), “Bank Governance, Regulation and Risk Taking”,
NBER Working Paper Series, No: 14113. 
Ng, T.H., Lim, Y.S. and Tan N. L., (2010), “Deposit Insurance and Bank Risks: The
Case of Malaysia”, European Journal of Economics, Finance and Administrative
Sciences, Issue 18, 19-27.
Ninimaki, J-P. (2000), “The Effects of Competition on Banks’ Risk Taking with and
without Deposit Insurance”, Bank of Finland Discussion Papers, No. 21. 
Pennacchi, G. (2006), “Deposit Insurance, Bank Regulation and financial System
Risks”, Journal of Monetary Economics, Vol. 53, pp. 1-30. 
Silva, N. (2008), “Deposit Insurance, Moral Hazard and The Risk of Runs”, Central
Bank of Chile Working Papers No. 478.
Şıklar, İ. (2004), Finansal Ekonomi, Anadolu Üniversitesi Ya., No. 1588, Eskişehir. 
Yoon, K.H. and Jun, Y.S. (2012), “Deposit Insurance Increase and Risk Taking by
Banks”, International Research Journal of Finance and Economics, Issue 91. 
Wheelock, D.C. and Wilson, P.W. (1994), “Can Deposit Insurance Increase the Risk
of Bank Failure? Some Historical Evidence”, Federal Reserve Bank of St.Louis
Review, Vol. 76, No. 3, May/June 1994, pp. 57-71. 
Wu, R-J, and Chi, C-P, (2006), “Competition, Deposit Insurance and Bank Risk
Taking”, http://centerforpbbefr.rutgers.edu/2006/Paper%202006/16AS02-056
Chien-Ping%20Chi.pdf.

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Details

Journal Section	Articles
Authors	Gamze Gocmen Yagcilar
Publication Date	November 8, 2015
Published in Issue	Year 2014 Volume: 3 Issue: 4

Cite

APA	Yagcilar, G. G. (2015). EFFECTS OF DEPOSIT INSURANCE SYSTEM ON BANKS’ RISK TAKING INCENTIVES IN TURKEY. Journal of Business Economics and Finance, 3(4).

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