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The Impact of Deposit Insurance System on Insolvency Risk in Selected European Countries’ Banking Sectors in the Years 2004–2016
Abstract
The rationale behind the creation of the deposit insurance system (DIS) in the financial system’s safety net was primarily to stabilize banking systems by preventing the risk of a bank run and to counteract the effects of credit institutions’ insolvency. In theory and practice, however, issues of side effects resulting from DIS functions, including moral hazard, are raised. The article analyzes the impact of DIS factors on insolvency of banking systems on the example of 42 European countries in the years 2004–2016. Three databases constituted the empirical basis: the International Monetary Fund’s Deposit Insurance Database, the European Banking Authority’s Deposit Guarantee Schemes and the World Bank’s Global Financial Development Database. The results of the main model for the entire analyzed set of banking systems indicate that, in principle, DIS reduces insolvency risk. On the other hand, taking into account additional dichotomous criteria (Euro zone countries and others, European Union countries and others, Central and Eastern Europe countries and others) or classification criteria (countries with low, middle and high income, countries with low, medium and high levels of moral hazard), the analysis of this set indicates that DIS may contribute to an increase of banking sectors’ insolvency risk.
Keywords:
bank , deposit , deposit insurance system , risk , bank insolvency , banking systemJEL Codes
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This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Vol. 81 No. 4 (2020)
Published: 2022-02-16
10.26354
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.