Management Review

›› 2018, Vol. 30 ›› Issue (10): 14-25.

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The Expectation of Government Guarantee, Deposit Insurance Coverage and Banks' Risk-taking

Wang Xiaobo1, Liu Wei1, Xin Feifei2   

  1. 1. School of Economics & Management, Tongji University, Shanghai 200092;
    2. School of Transportation Engineering, Tongji University, Shanghai 201804
  • Received:2016-07-19 Online:2018-10-28 Published:2018-10-23

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Abstract:

With the expectation of government guarantee considered, this paper, taking financial data of 116 banks in 17 Euro Countries from 2004 to 2014 as samples, examines the relationship between banks' risk-taking and deposit insurance coverage respectively in the pre-crisis period, crisis period and post-crisis period. The results verify the U-shaped relationship between banks' risk-taking and deposit insurance coverage. This indicates that the increase of deposit insurance coverage will not necessarily improve the level of bank's risk exposure; there is an optimal deposit insurance coverage which can minimize banks' risk-taking. Meanwhile, the results also indicate that the temporary government's guarantee in the crisis period will make the optimal deposit insurance coverage no longer exist even through the guarantee is cancelled by enhancing the expectation of market entities to the government's guarantee. Furthermore, we purpose that a high deposit insurance coverage which can weaken the expectation of market entities to the government's guarantee will be more beneficial to clear governmental function orientation and alleviate the moral hazard problem in the start-up period of China's deposit insurance system.

Key words: the expectation of government guarantee, deposit insurance coverage, banks' risk-taking, moral hazard