Deposit Insurance and Financial Development. Robert Cull (World Bank) Lemma W. Senbet (U. of Maryland) Marco Sorge (Stanford U.)

Transcription

1 Depost Insurance and Fnancal Development Robert Cull (World Bank) Lemma W. Senbet (U. of Maryland) Marco Sorge (Stanford U.) 1

2 Motvaton Do depost nsurance programs contrbute to fnancal stablty and development? Bank runs and rsk of systemc bank falure Credble depost nsurance as a stablzng force Fnancal depth and economc growth Adverse consequences of depost nsurance Moral hazard and ncentve problems Greater systemc nstablty n lax regulatory envronments 2

3 What we do n ths paper: outlne Examne the effect of depost nsurance on fnancal stablty and development level of fnancal actvty stablty of bankng sector qualty of resource allocaton and real sector performance Emprcs guded by a theory of bankng regulaton based on agency paradgms observed features of depost nsurance programs: 58 countres generosty and entry hurdles: unque data set Indexng depost nsurance features Effects of depost nsurance on sze and volatlty of the fnancal sector 3

4 Theory and predctons Model: Agency paradgms: depost (bank) nsttuton as the nexus of contracts Depostors Bank owners Bank management Regulators and tax-payers Socal planner s objectve functon: based on two goals Mnmzng the loss of value resultng from dstortonary nvestment polcy (agency costs) Maxmzng the value of bank actvty n the lqudty servces that banks provde (bank lablty sde) and ther role as nformed agents n an envronment of mperfect nformaton - screenng and montorng of borrowers (bank asset sde) 4

5 Bank ncentves: nvestment dstorton and excessve rsk-takng Payoffs to bank stakeholders Max (0, X-F) Payoff to bank owners Max(0,F-X) Government oblgatons F Mn (X, F) Payoff to depostors (unnsured) Bank cash flow (X) Fgure 1: Parttonng of Income from Bank Asset Portfolo Note: Along the horzontal axs, we measure cash flows from bank assets (e.g. loans), and these cash flows are parttoned among depostors and bank owners. The parttoned clams are measured along the vertcal axs. 5

6 Formalzng bank ncentves and depost nsurance effects Bank value V 1 * V 1 Value under bank asset rsk-shftng Bank 2 Bank 1 σ σ 1 * 1 Rsk ( σ) Fgure 2: Bank Investment Opportuntes 6

7 Multple banks and rsk ncentves Bank value V 1 (σ) V 2 (σ) V 3 (σ) σ 1 * σ 2 * σ 3 * Rsk (σ) Fgure 3: Captal Requrements and Multple Banks 7

8 Testable predctons: 1 Fnancal nstablty and moral hazard (volatlty effect) Excessve rsk-takng to excessve fnancal volatlty beyond socally optmal level Wth unresolved moral hazard, depost nsurance nduces more fnancal nstablty Economc neffcency (value effect) Dstortons n bank nvestment actvtes (loans) away from the socally optmal levels of nvestments Declne n economc performance n the bankng sector Asset regulaton: counterproductve measure 8

9 Testable predctons: 2 Captal regulaton effect (entry hurdle and effectveness) Lmted effectveness of captal regulaton Tme-nconsstency of depost nsurance premum Optmal regulaton and the rule of law Consder an optmal, ncentvzed bankng regulaton If regulators themselves have dstorted ncentves, no mplementaton of optmal regulaton 9

10 Prncpal components ndces: depost nsurance features Generosty: moral hazard coverage lmts foregn currency coverage nterbank coverage fundng source (bnk, gov) management (offcal, prvate) co-nsurance Entry hurdles: requrements compulsory membershp ex ante fundng premum payment rsk-adjusted premum 10

11 Y = + β G G + β G G Law + β H H + β H 2 α H Law + β X + β R + X r ε Basc estmatng equaton, where: Y s growth rate or volatlty of an ndcator of fnancal development n country G s generosty of depost nsurance H s weakness of entry hurdles Law s qualty of the rule of law (proxy for qualty of regulaton, supervson) X s macroeconomc controls (nflaton, real growth,...) R s other bankng sector controls (age of program, concentraton,...) 11

12 Y = + β G G + β G G Law + β H H + β H 2 α H Law + β X + β R + X r ε Hypotheses: Y = volatlty (σ); coeffcent of varaton n LL/GDP or Prv Credt/GDP generosty more volatlty (β G1 >0) sound regulaton can negate volatlty due to generosty (β G2 <0) lower entry hurdles more volatlty (β H1 >0) sound regulaton can negate volatlty due to low entry hurdles (β H2 <0) 12

13 Y = + β G G + β G G Law + β H H + β H 2 α H Law + β X + β R + X r ε Hypotheses: Y = fnancal development (growth n V); growth rate of LL/GDP or Prv Credt/GDP generosty nstablty slower long run fnancal development (LRFD), (β G1 <0) sound regulaton can negate that nstablty faster LRFD (β G2 >0) lower entry hurdles nstablty slower LRFD (β H1 <0) sound regulaton can negate that nstablty faster LRFD (β H2 >0) 13

14 Estmaton Dependent varables: coeffcent of varaton and growth rate of Prv Credt and LL Prncpal component ndces of depost nsurance features (one for generosty moral hazard, another for entry hurdles adverse selecton ) Two-stage estmaton to correct for sample selecton bas assocated wth adopton of explct depost nsurance One observaton per country, varables calculated as an average over all years for whch data are avalable from for the country n queston Selecton stage: all varables measured pror to adopton of DI; Volatlty/growth stage: varables measured after DI adopton. 14

15 Y = + β G G + β G G Law + β H H + β H 2 α H Law + β X + β R + X r ε Results: Y = Volatlty (σ) generosty more volatlty (β G1 ** >0) sound regulaton can negate volatlty due to generosty (β G2 ** <0) lower entry hurdles more volatlty (β H1 ><0, nsgnfcant) sound regulaton doesn t reduce volatlty due to low entry hurdles (β H2 ><0, nsgnfcant) 15

16 Y = + β G G + β G G Law + β H H + β H 2 α H Law + β X + β R + X r ε Results: Y = fnancal development (growth n V); generosty nstablty slower long run fnancal development (LRFD), (β G1 ** <0) sound regulaton can negate that nstablty; n a sound regulatory envronment, generosty faster LRFD (β G2 ** >0) lower entry hurdles nstablty slower LRFD (β H1 ><0, nsgnfcant) sound regulaton can negate that nstablty faster LRFD (β H2 ><0, nsgnfcant) 16

17 Y = + β G G + β G G Law + β H H + β H 2 α H Law + β X + β R + X r ε Asymmetry of results: assets (Prv Cred) vs. labltes (LL) Negatve effects of generosty on LRFD more pronounced for Prv than LL ( β G1 for Y =Prv > β G1 for Y =LL) Law negates those effects more for LL than Prv (β G2 for Y =LL > β G2 for Y =Prv) LL, less negatve generosty effect, more easly overcome; Prv, more negatve generosty effect, less easly overcome Implcaton: almost all levels of Law more LL growth; but, only for hgh Law more Prv growth 17

18 Conclusons Depost nsurance leads to fnancal nstablty n lax regulatory envronments Desred mpact on fnancal development and growth under good regulatory/rule of law Entry hurdle results are surprsng, but consstent wth tme-nconsstency of depost nsurance prema n controllng bank rsk ncentves Depost nsurance and bank concentraton Lmtatons and extensons: captal regulaton effects alternatve ndcatons of nsttutonal development fnancal development n the non-bankng sector 18