1. Deposit Insurance Coverage, Ownership, and Banks’ Risk- taking in Europe Apanard Angkinand Department of Economics, University of Illinois at Springfield Clas Wihlborg Center for Law, Economics and Financial Institutions at CBS (LEFIC), Copenhagen Business School

2. Objectives What are the effects of deposit insurance and bank governance on banks’ risk-taking incentives? –The probability of banking crises. –Non-performing loans/total loans on the country level Emphasis on credibility of non-insurance as the main factor determining the degree to which banks’ risk-taking is disciplined by market forces. How do the governance structures of banks, including ownership, shareholder and creditor protection, concentration, and supervisory policies, affect the credibility of non-insurance? Implications for deposit insurance coverage in Europe

3. Literature Caprio and Klingebiel (2002), banking crises Demirgüç-Kunt et al. (2005); database for dep. ins. Demirgüç-Kunt and Detragiache (1997 and 2002), Hutchison and McDill (1999), etc. Barth, Caprio and Levine (2006) Aw (2005)

4. Theory and Hypotheses Hypothesized relationships between explicit deposit insurance coverage (EC) and risk-taking (RT) and the impact of institutional and banks’ ownership variables Implicit Explicit Implicit  Institution EC RT

5. Hypotheses w. r. t. governance The relationship between explicit deposit insurance coverage and risk-taking is described by a flatter curve for banks/countries with relatively low quality of governance from shareholders’ point of view. Thus, we expect risk-taking to be higher at very low and very high levels of explicit coverage in banks/countries with relatively high quality of governance. At intermediate levels of explicit coverage where market discipline is potentially strong, we expect risk-taking to decrease with higher quality of bank governance.

6. Data and Methodology Onset of Banking Crisis, Panel, 1985-2003 –Logit with robust and clustering standard errors allow any type of correlation among the observations across time within each country. Non-performing Loans/Total Loans (IMF), 1997-2003 –OLS; Haussman test suggests the use of the random effects Explicit Dep Ins. Coverage (EC) and (EC) 2 Macroeconomic Control variables Control for Institutional Quality Ownership/Governance characteristics

7. Deposit insurance (EC), inst. quality and governance EC 1. Covdepint: Intervals of covdep = Coverage limit/Total deposits per capita (Coverage per average deposit) EC 2. Ln(1+covdep) only in Table 8. Institutional quality –GDP/capita, Rule of law, Corruption Governance –Legal Regime –State and foreign ownership –Shareholder and creditor rights, Private monitoring index, Concentration, Supervisorty power, activity restr

8. Results

9. Country (1) Actual Coverage Limit per Average Deposit (Covdepint) (2) Covdepint minimizing prob. of crisis, based on Table 7, col. 6 for W. Europe. Col. 8 for E. Europe (3) Covdep minimizing prob. of crisis; regression as in col. (2) but lnCovdep is coverage proxy (4) Covdepint minimizing prob of crisis; based on Table 7, col 4, ind+emg. (5) Covdepint minimizing NPL based on Table 8, col. 6; sample of ind + emg (6) Covdep minimizing NPL from regression as in col. (7) but lnCovdep is proxy fro coverage Western Europe Austria0.8 (1) 1.4 5.61.22.0Zero Belgium0.8 (1) - ---- Denmark2.3 (1) 1.5 1.90.91.5Zero Finland1.9 (1) 1.6 5.11.11.0Zero France3.9 (1) - ---- Germany0.8 (1) 1.3 zero1.42.5Zero Greece1.7 (1) 0.9 0.61.41.5Zero Iceland1.5 (1) 1.3 0.90.8-- Ireland0.7 (1) - --- Italy8.6 (1.5) 0.9 0.81.22.0Zero Luxembourg0.1 (1) 1.1 Full -- Netherlands0.7 (1) 1.4 2.51.11.4Zero Norway5.8 (1.5) 1.3 10.81.41.8Zero Portugal2.1 (1) 1.1 2.51.61.1Zero Spain1.3 (1) 1.1 1.71.01.5Zero Sweden0.9 (1) 1.5 3.51.1 Zero Switzerland0.4 (1) 1.3 2.81.41.6Zero United Kingdom1.9 (1) 1.2 41.61.91.1Zero Central and Eastern Europe Bulgaria10.9 (2) Full 2.90.6Zero Cyprus1.9 (1) Zero 1.2-- Czech Rep5.1 (1.5) Full 0.4Zero Estonia3.1 (1.5) Full Zero Hungary4.0 (1) Full 2.90.6Zero Latvia4.0 (1) Full 2.50.7Zero Lithuania12.1 (2) Full 2.60.2Zero Malta- Full 2.1-- Poland13.6 (2) Full 2.60.8Zero Romania12.3 (2) Full 2.31.0Zero Slovakia7.4 (1.5) Full 2.70.7Zero Slovenia3.4 (1) Zero 1.3 Zero