Effects of Deposit Insurance on Self-Discipline of Bank Franchise Value

Abstract

Foreign research has shown that the bank franchise value is the important mechanism of the bank's risk self-discipline. However, the relationship between the franchise value and the risk behavior of our bank must be based on our special financial background. Before the implementation of explicit deposit insurance system in China, there has been an implicit deposit insurance system guaranteed by the government. The traditional literature suggests that the implicit deposit insurance system provides a strong guarantee for commercial banks, which may weaken the risk discipline effect of the bank's franchise value, and the reasonable explicit deposit insurance system is superior to the implicit deposit insurance system. In the financial context of the explicit deposit insurance system, the self-discipline effect of the franchise value will be repaired. Based on the reality of establishing an explicit deposit insurance system in China, this paper uses the Tobin Q value to measure the franchise value of 16 listed banks in China. The relationship between the franchise value and risk of bank before and after the introduction of explicit deposit insurance is studied by using panel data model. The results show that before the implementation of the explicit deposit insurance system, the self-discipline effect of the franchise value is completely ineffective in the context of the government-guaranteed implicit deposit insurance system. The cross-item coefficient of the explicit deposit insurance system and the franchise value is significantly negative. It shows that the implementation of the explicit deposit insurance system has played a role in restoring the self-discipline effect of the bank's franchise value.

Bank stability in South Africa: what matters?

“…In the context of high concentration within the South African market, the franchise value paradigm and concentration-fragility/stability nexus can adequately guide this study (Dexu, 2016;Zhao, 2017). However, it is prudent to acknowledge relationship between banking sector concentration, competition and stability as not straightforward (Carletti & Hartmann, 2003).…”

“…The "franchise value" paradigm posits that banks are constrained from risk-taking behavior as the costs for such activities rise with the value of the entity over and above its tangible assets (Zhao, 2017;Keeley, 1990). High competition would eat into profits, and thus franchise value.…”