Capital Adequacy, Deposit Insurance, and the Effect of Their Interaction on Bank Risk

Seksak Jumreornvong, Chanakarn Chakreyavanich, Sirimon Treepongkaruna, Pornsit Jiraporn

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Abstract

This paper investigates how deposit insurance and capital adequacy affect bank risk for five developed and nine emerging markets over the period of 1992-2015. Although full coverage of deposit insurance induces moral hazard by banks, deposit insurance is still an effective tool, especially during the time of crisis. On the contrary, capital adequacy by itself does not effectively perform the monitoring role and leads to the asset substitution problem. Implementing the safety nets of both deposit insurance and capital adequacy together could be a sustainable financial architecture. Immediate-effect analysis reveals that the interplay between deposit insurance and capital adequacy is indispensable for banking system stability.

Original languageEnglish
Article number79
Number of pages18
JournalJournal of risk and financial management
Volume11
Issue number4
DOIs
Publication statusPublished - Dec 2018

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