Munich Personal RePEc Archive

Banking Instability and Deposit Insurance: The Role of Moral Hazard

Ngalawa, Harold and Tchana Tchana, Fulbert and Viegi, Nicola (2011): Banking Instability and Deposit Insurance: The Role of Moral Hazard.

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Abstract

This paper aims at empirically investigating the role of moral hazard in the e¢ ctivity of deposit insurance in achieving banking stability. If the negative e¤ect of deposit insurance on banking stability is through moral hazard, then deposit insurance will be associated with banking insolvency and credit crunch more than with bank runs. To test this hypothesis, we compute measures of these two types of banking instability. We �nd that deposit insurance per se has no signi�cant e¤ect either on bank insolvency and credit crunch or on bank runs. However, when the deposit insurance is coupled with an increase in credit to private sector, it has a positive and signi�cant e¤ect on bank insolvency and credit crunch but not on bank runs.

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