TY - JOUR

T1 - Can strong capital regulation prevent risk-taking from deposit insurance?

AU - Bartholdy, Jan

AU - Justesen, Lene Gilje

N1 - Publisher Copyright: © 2020 Informa UK Limited, trading as Taylor & Francis Group. Copyright: Copyright 2020 Elsevier B.V., All rights reserved.

PY - 2021

Y1 - 2021

N2 - Can strong capital regulation prevent risk-taking from deposit insurance? Denmark offers a unique setting providing solid identification for testing risk incentives from deposit insurance under strong capital regulation. The Danish system is a universal system without strong risk exposure regulation. Commercial banks and savings banks have different ownership structures but are subject to the same set of regulations, but savings banks have no incentive to increase risk after the implementation of a deposit insurance scheme. We show that commercial banks did not increase their risk at the introduction of deposit insurance compared to savings banks. We attribute this to strong capital requirements and a firm closure policy. The results also hold for large commercial banks, indicating that the systemic risk did not increase either. Finally, there is no evidence that commercial banks increase their risk by allowing their customers to increase their leverage (risk) compared with customers in savings banks.

AB - Can strong capital regulation prevent risk-taking from deposit insurance? Denmark offers a unique setting providing solid identification for testing risk incentives from deposit insurance under strong capital regulation. The Danish system is a universal system without strong risk exposure regulation. Commercial banks and savings banks have different ownership structures but are subject to the same set of regulations, but savings banks have no incentive to increase risk after the implementation of a deposit insurance scheme. We show that commercial banks did not increase their risk at the introduction of deposit insurance compared to savings banks. We attribute this to strong capital requirements and a firm closure policy. The results also hold for large commercial banks, indicating that the systemic risk did not increase either. Finally, there is no evidence that commercial banks increase their risk by allowing their customers to increase their leverage (risk) compared with customers in savings banks.

KW - Deposit insurance

KW - difference-in-difference

KW - moral hazard

UR - http://www.scopus.com/inward/record.url?scp=85097929999&partnerID=8YFLogxK

U2 - 10.1080/1351847X.2020.1860107

DO - 10.1080/1351847X.2020.1860107

M3 - Journal article

AN - SCOPUS:85097929999

VL - 27

SP - 1164

EP - 1185

JO - European Journal of Finance

JF - European Journal of Finance

SN - 1351-847X

IS - 12

ER -