Deposit Insurance Adoption and Bank Risk-Taking: the Role of Leverage

Pre-print, Working paper: Explicit deposit insurance is a crucial ingredient of modern financial safety nets. This paper investigates the effect of deposit insurance adoption on individual bank leverage. Using a panel of banks across 117 countries during the period 1986-2011, I show that deposit insurance adoption pushes banks to increase significantly their leverage by reducing their capital buffer. This increase in bank leverage then translates into higher probability of insolvency. Most importantly, I bring evidence that deposit insurance adoption has important competitive effects: I show that large, systemic and highly leveraged banks are unresponsive to deposit insurance adoption.

Author(s)

Mathias Lé

Date of publication
  • 2013
Keywords JEL
G18 G21 G28 G32
Keywords
  • Deposit Insurance
  • Bank Risk-Taking
  • Leverage
  • Systemic Bank
  • Capital Buffer
Internal reference
  • PSE Working Papers n°2013-41
Version
  • 1