Dilemma of deposit insurance policy in ASEAN countries: Does it promote banking industry stability or moral hazard?

• Main Authors: Suhal Kusairi, Nur Azura Sanusi, Abdul Ghafar Ismail
• Format: Article
• Language: English
• Published: Elsevier 2018-03-01
• Series: Borsa Istanbul Review
• Subjects: Banking stability; Deposit insurance; Financial policy; GMM
• Online Access: http://www.sciencedirect.com/science/article/pii/S2214845017300558

The goal of this article is to investigate the influence of deposit insurance policy on the stability of the banking industry. Stability is measured by the ratio of retail deposits to total assets and the ratio of loans to total assets to cover both positive and negative impacts, and deposit insurance policy is assessed in various stages. The survey uses a data panel of 127 commercial banks from 2000 to 2013 in six member countries of the Association of Southeast Asian Nations (ASEAN). Using a dynamic panel data investigation, we obtain results showing that the implementation of deposit insurance policy negatively affects the ratio of retail deposits to total assets while positively influencing the ratio of loans to total assets. This is an important finding, as it implies that deposit insurance policy causes bank managers to take greater risks to increase their returns, rather than increasing the confidence level of depositors and ultimately increasing total deposits. This result is important for regulators as they evaluate deposit insurance policy and anticipate any negative outcomes that might follow.