Explicit Deposit Insurance and Bank Risk-Taking: Does Banking Supervision Matter?

This study explores the influence of supervisory powers and structure of a banking supervisor on the bank’s risk-taking caused by the implementation of explicit deposit insurance (EDI). We explore the data of publically traded 1,936 banks of 96 countries, from the Bank scope during 2002 to 2015. Using the Hierarchical Linear Modeling (HLM), findings revealed that banking supervision reduces the moral hazard of bank’s risk-taking in non-crisis affected countries, either allocated supervisory powers are low or high. Additionally, conferring the greater supervisory authority to banking supervisor strengthened the financial health of banks amongst both crisis and non-crisis affected countries. Furthermore, central bank working as a banking supervisor with greater supervisory powers seemed to mitigate the moral hazard of bank’s risk-taking. While central bank’s low supervisory powers have little or no impact to controlling the bank risk-taking. Hence, the allocation of greater supervisory powers to a central bank heightens the investors and depositors’ confidence in the depository financial institutions.