Safety Net Design and Systemic Risk: New Empirical Evidence

Klüh, Ulrich

doi:10.5282/ubm/epub.662

2005

DOI: 10.5282/ubm/epub.662

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Safety Net Design and Systemic Risk: New Empirical Evidence

Ulrich Klüh¹

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Deposit Insurance, Institutions, and Bank Interest Rates

Carapella

Giorgio

2004

Transition Stud Rev

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Abstract:Many recent institutional reforms of the financial system have relied on the introduction of an explicit scheme of Deposit Insurance. This instrument aims at two main targets, contributing to systemic stability and protecting depositors. However it may also affect the interest rate spread in the banking system, which can be viewed as an indicator of market power in this financial segment. This paper provides an empirical investigation of the effect of deposit insurance and other institutional and economic variables on bank interest rates across countries. We find that deposit insurance increases the lending borrowing spread in banking. The main effect seems to arise not from the deposit side though, but from an increase in the lending rate. We interpret this result as evidence of the presence of moral hazard problems related to this instrument. We also find that higher quality of institutions is associated with lower spreads, thus contributing to eroding sources of market power in the banking sector.

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Deposit Insurance, Institutions, and Bank Interest Rates

Carapella

Giorgio

2004

Transition Stud Rev

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Safety Net Design and Systemic Risk: New Empirical Evidence

Cited by 1 publication

References 46 publications

Deposit Insurance, Institutions, and Bank Interest Rates

Deposit Insurance, Institutions, and Bank Interest Rates

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