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Does deposit insurance retard the development of non-bank financial markets?

Author

Listed:
  • Bergbrant, Mikael C.
  • Campbell, Kaysia T.
  • Hunter, Delroy M.
  • Owers, James E.

Abstract

Whether, and how, the introduction of deposit insurance affects non-bank financial market development depends on whether banks and non-bank financial markets are substitutes or complements and theory has conflicting views. Using data on 134 countries over a 28-year period and several identification strategies we find that the introduction of deposit insurance retards the equity market, the non-bank depositaries sector, and the banking sector when law and order is weak. While strong law and order mitigates this effect, it does not lead to a positive outcome for all markets. For non-bank financial markets, the effect is greater in the long run so that while deposit insurance increases banking sector development in the long run, it retards non-bank financial markets regardless of the level of law and order. Finally, several design features exacerbate the negative outcomes. Our results have important policy implications for implementing or altering deposit insurance schemes.

Suggested Citation

  • Bergbrant, Mikael C. & Campbell, Kaysia T. & Hunter, Delroy M. & Owers, James E., 2016. "Does deposit insurance retard the development of non-bank financial markets?," Journal of Banking & Finance, Elsevier, vol. 66(C), pages 102-125.
    • Handle: RePEc:eee:jbfina:v:66:y:2016:i:c:p:102-125
    DOI: 10.1016/j.jbankfin.2016.01.013
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    Citations

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    Cited by:

    1. Olesya V. Kononenko & Marina V. Chudinovskikh, 2018. "Comparative Analysis of the Depositor Rights’ Protection Systems in the Russian Federation and the Republic of Belarus," Journal of New Economy, Ural State University of Economics, vol. 19(5), pages 32-43, October.
    2. Ji, Yang & Bian, Wenlong & Huang, Yiping, 2018. "Deposit insurance, bank exit, and spillover effects," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 268-276.
    3. Delis, Manthos & Iosifidi, Maria & Papadopoulos, Panagiotis, 2020. "Blessing or curse? Government funding of deposit insurance and corporate lending," MPRA Paper 99153, University Library of Munich, Germany.
    4. Delis, Manthos D. & Iosifidi, Maria & Papadopoulos, Panagiotis, 2022. "Blessing or curse? Government funding of deposit insurance and corporate lending," Journal of Financial Stability, Elsevier, vol. 61(C).
    5. Chen, Wang & Zhang, Zhiwen & Hamori, Shigeyuki & Kinkyo, Takuji, 2021. "Not all bank systemic risks are alike: Deposit insurance and bank risk revisited," International Review of Financial Analysis, Elsevier, vol. 77(C).
    6. Kaelo Mpho Ntwaepelo, 2023. "Bank Stability versus Financial Development: A Generous Deposit Insurer's Dilemma," Economics Discussion Papers em-dp2023-09, Department of Economics, University of Reading.

    More about this item

    Keywords

    Deposit insurance; Financial market development; Non-bank financial markets; Risk-shifting;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G2 - Financial Economics - - Financial Institutions and Services
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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