Implicit deposit insurance and deposit guarantees: Characteristics of Australian bank risk premia

Abstract

This paper examines the hypothesis that CD issue yields of Australian banks incorporate a premium that reflects bank risk. Our empirical analysis of Australian banks’ CD premiums suggests the data is consistent with this hypothesis and hence supports the view that CD holders do not perceive their deposits as being risk‐free. Nor do we find any statistically significant difference between the premiums paid by private banks with implicit deposit insurance vis‐a‐vis those paid by government‐owned banks with explicit government guarantees.

Factors Determining Net Interest Margins in Australia: Domestic and Foreign Banks

“…In this context, these banks can be considered ‘too big to fail’ and so receive implied deposit insurance (Terry and Trayler, 2004). 11 Dennis , et al (1998) concluded that observed Australian bank Certificate of Deposit yields reflected the too big to fail effect. Thus, it is likely that the four major Australian banks are able to benefit from the too big to fail effect via higher interest margins.…”

Market Discipline and Deposit Guarantee: Evidence from Australian Banks

“…The three prior studies of market discipline in Australia, Dennis et al. (), Sharpe and Tuzun (), and Esho et al. (), do not provide consistent results.…”

“…The first study, Dennis et al. (), tests the relation between the certificates of deposit (CD) premium and bank risk in Australia. Using the data of 23 banks from January 1989 to June 1992, they show that the CD premium is inversely related to bank risk as measured by both capital and liquidity.…”

“…Following Australian studies such as Dennis et al. () and Esho et al. (), the spread (i.e., difference in rates) is used.…”

The Global Financial Crisis and Its Impact on Australian Bank Risk

“…This implicit versus explicit position is discussed in some detail inDennis et al (1998).Australian Bank Risk…”