Market Discipline and Deposit Guarantee: Evidence from Australian Banks

“…The empirical literature on deposit insurance and market discipline shows, however, that not all countries chose to use deposit insurance and bailouts to the same degree. To the extent that countries limit deposit insurance, they encourage market discipline on banks, with important stabilizing effects on banks' risk management (Demirguc-Kunt and Detragiache 2002;Demirguc-Kunt and Huizinga 2004;Martinez Peria and Schmukler 2001;Calomiris and Powell 2001;Yan, Skully, Avram, and Vu 2014;Calomiris and Jaremski 2016b). 34 Clearly, the last several decades have seen a decline in the importance of central banks' LOLR assistance as the primary instruments for managing shocks to banking systems.…”

Section: The Brave New World Of Blank-check Support For Banksmentioning

confidence: 99%

Political Foundations of the Lender of Last Resort: A Global Historical Narrative

2016

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This Discussion Paper is issued under the auspices of the Centre's research programme in FINANCIAL ECONOMICS. Any opinions expressed here are those of the author(s) and not those of the Centre for Economic Policy Research. Research disseminated by CEPR may include views on policy, but the Centre itself takes no institutional policy positions. The Centre for Economic Policy Research was established in 1983 as an educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and non-partisan, bringing economic research to bear on the analysis of medium-and long-run policy questions. These Discussion Papers often represent preliminary or incomplete work, circulated to encourage discussion and comment. Citation and use of such a paper should take account of its provisional character.

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“…See Brewer (), Caprio and Klingebiel (), Martinez‐Peria and Schmukler (), Calomiris and Powell (), Demirgüç‐Kunt and Detragiache (), Honohan and Klingebiel (), Demirgüç‐Kunt and Huizinga (), Cull, Senbet, and Sorge (), Barth, Caprio, and Levine (), Demirgüç‐Kunt, Kane, and Laeven (), Beck and Laeven (), Laeven and Valencia (), Yan et al. (), and Calomiris and Chen ().…”

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confidence: 99%

“…Yan et al. () contrast institutions within Australia that were differentially affected by deposit insurance protection. These studies likely suffer less than others from possible endogeneity bias in identifying the effects of deposit insurance.…”

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confidence: 99%

Stealing Deposits: Deposit Insurance, Risk‐Taking, and the Removal of Market Discipline in Early 20^th‐Century Banks

Calomiris¹,

Jaremski

2019

The Journal of Finance

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Deposit insurance reduces liquidity risk but can increase insolvency risk by encouraging reckless behavior. Several U.S. states installed deposit insurance laws before the creation of the Federal Deposit Insurance Corporation, and those laws applied only to some depository institutions within those states. These experiments present a unique testing ground for investigating the effect of deposit insurance. We show that deposit insurance removed market discipline constraining uninsured banks. Taking advantage of World War I's rise in world agricultural prices, insured banks increased their insolvency risk and competed aggressively for deposits. When prices fell after the war, the insurance systems collapsed and suffered high losses.DEPOSIT INSURANCE SPREAD THROUGHOUT the world in the latter half of the 20 th century as a result of external and internal political pressures favoring its adoption (Demirgüç-Kunt, Kane, and Laeven (2008)). The International Monetary Fund, the European Union, and the World Bank have all endorsed deposit insurance. Despite its overwhelming political support, however, a large empirical literature suggests that the moral-hazard costs of deposit insurance have outweighed its liquidity-risk-reduction benefits. 1 These papers show that deposit insurance is among the most important contributors to the unprecedented wave of banking crises that has washed over the world during the past

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Market Discipline and Deposit Guarantee: Evidence from Australian Banks

Cited by 6 publications

References 25 publications

The Global Financial Crisis and Its Impact on Australian Bank Risk

The Global Financial Crisis and Its Impact on Australian Bank Risk

Political Foundations of the Lender of Last Resort: A Global Historical Narrative

Stealing Deposits: Deposit Insurance, Risk‐Taking, and the Removal of Market Discipline in Early 20^th‐Century Banks

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Market Discipline and Deposit Guarantee: Evidence from Australian Banks

Cited by 6 publications

References 25 publications

The Global Financial Crisis and Its Impact on Australian Bank Risk

The Global Financial Crisis and Its Impact on Australian Bank Risk

Political Foundations of the Lender of Last Resort: A Global Historical Narrative

Stealing Deposits: Deposit Insurance, Risk‐Taking, and the Removal of Market Discipline in Early 20th‐Century Banks

Contact Info

Product

Resources

About

Stealing Deposits: Deposit Insurance, Risk‐Taking, and the Removal of Market Discipline in Early 20^th‐Century Banks