Deposit Insurance Coverage, Ownership, and Banks’ Risk-taking in Europe discussion by Leonardo Gambacorta Research Department - Banca d’Italia The Changing Geography of Banking Ancona - September 22, 2006

L. GambacortaAncona - September 22, 2006 Structure of the discussion 1.Main novelty of the paper 2.Characteristics of the econometric analysis: the variables used in the specification the test performed 3.Check of the robustness of the results and their policy implications

L. GambacortaAncona - September 22, 2006 Risk-taking (Market discipline) Explicit Deposit Insurance 1. Idea Angkinand-Wihlborg (2005) Standard relationship U-shaped relationship ED* U-shaped + Governance

L. GambacortaAncona - September 22, Econometric analysis Data for more than 100 countries –Industrialized vs Emerging countries Two kinds of measures for banks’ risk-taking: –The onset of a banking crises (1 in the first year) –Non-performing loans to total loans Explicit deposit coverage: coverage limit to deposit per capita (rescaled 0-3) Proxies for governance: 1) bank competition, 2) foreign ownership, 3) government ownership, 4) shareholders rights, 5)creditors rights

L. GambacortaAncona - September 22, 2006 Is the NPL ratio the right measure for banking crises? Bad loans depends on the risk of a bank portfolio, while crises depend on the exhaustion of capital. Need for other control variables: –Excess capital: bank capital – min. cap. req. –A direct proxy for market discipline (relevance of subordinate debt or bond markets) The definition for bad loans is not equal among countries and it is impossible to make meaningful comparisons Securitization effect

L. GambacortaAncona - September 22, 2006 NPL: Flows vs stocks – the Italian case Securitization effect

L. GambacortaAncona - September 22, 2006 Normalization for Covdepint seems ad hoc It is very odd to use a categorical variable (rescaled arbitrarily between 0 and 3) as a continuous one Possible solution: use of dummy variables for each range of covdepint in such a way that the U-shaped relationship between banks’ risk taking and explicit deposit insurance is directly gleaned by the data

L. GambacortaAncona - September 22, 2006 Interactions between Deposit Insurance Coverage (EC) and Government Variables (GOV) L i,t =  +  1 EC i,t-1 +  2 (EC i,t-1 ) 2 +  * GOVi,t-1+ +  1 EC i,t-1 * GOV i,t-1 +  2 (EC i,t-1 ) 2 * GOV i,t-1 + … … the interaction occurs only with the linear term rather then the quadratic because the authors expect the stronger effect of institutional and governance variables on implicit depositor protection to be evident only in the left part of the figure 1 (  2 =0) → Test directly this hypothesis checking for the statistical significance of the coefficient term  2

L. GambacortaAncona - September 22, Robustness Checks: euro area (Table 9) Are these differences statistically significant?

L. GambacortaAncona - September 22, 2006 Eastern and Cent. European (Table 9)

L. GambacortaAncona - September 22, 2006 Industrial vs Emerging (Table 6)

L. GambacortaAncona - September 22, 2006 Industrial vs Emerging plus FE (Table 6)

L. GambacortaAncona - September 22, 2006