Working Paper: NBER ID: w9322
Authors: Armen Hovakimian; Edward J. Kane; Luc Laeven
Abstract: Risk-shifting occurs when creditors or guarantors are exposed to loss without receiving adequate compensation. This paper seeks to measure and compare how well authorities in 56 countries controlled bank risk shifting during the 1990s. Although significant risk shifting occurs on average, substantial variation exists in the effectiveness of risk control across countries. We find that the tendency for explicit deposit insurance to exacerbate risk shifting is tempered by incorporating loss-control features such as risk-sensitive premiums, coverage limits, and coinsurance. Introducing explicit deposit insurance has had adverse effects in environments that are low in political and economic freedom and high in corruption.
Keywords: No keywords provided
JEL Codes: G21; G28; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| explicit deposit insurance (G28) | risk shifting (H22) |
| low political and economic freedom + high corruption (O17) | risk shifting (H22) |
| loss-control features (G33) | risk shifting (H22) |
| regulatory and market discipline (G18) | risk shifting (H22) |
| explicit deposit insurance + low political and economic freedom + high corruption (G28) | risk shifting (H22) |