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Post by Sapphire Capital on Jan 28, 2009 21:59:49 GMT 4
Deposit Insurance, Risk-Taking and Banking Crises: Is there a Risk-Minimizing Level of Deposit Insurance Coverage? Apanard P. Angkinand Milken Institute; University of Illinois at Springfield - Department of Economics Clas Wihlborg Chapman University; Copenhagen Business School - Department of Finance November 4, 2008 Abstract: Explicit deposit insurance is a two-edged sword with respect to risk taking. High explicit coverage creates incentives to shift risk to a deposit insurance fund or taxpayers; low explicit coverage may be associated with strong implicit insurance reflecting lack of credibility of non-insurance. Institutions that allow banks to fail without serious contagion effects enhance this credibility. Alternative measures of banks' risk taking are used to test the hypothesis expressed as a U-shaped relationship between explicit coverage and risk taking. The hypothesis is strongly supported when the occurrence of banking crises and non-performing loans are proxies for risk-taking in a country's banking system. Institutional characteristics affect the relation between explicit coverage and risk-taking. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1295452_code565363.pdf?abstractid=1295452&mirid=2
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