Desmontaje y análisis de determinantes de riesgos

Deposit insurance is certainly a “risk minimizer”, preventing panic runs by strengthening public confidence and hence supporting the stability of banking operations. However, the deposit insurance system certainly cannot absolutely stop a banking crises or be the guarantee of banking stability. The financial crisis in 2007/2008 brought renewed attention to the concept and practice of deposit insurance by regulators around the world. Many countries that were yet to adopt or delayed in adopting a deposit insurance system had to do so in the wake of the crisis. During the crises, the prevention of bank runs to ensure financial stability was a vital concern for governments rather than the problem of moral hazard. Australia, for instance, was among the last few countries to implement an

explicit deposit insurance system in October 2008. Although deposit insurance is widely accepted, there is no universal design for a deposit insurance system. The designs and institutional arrangement of deposit insurance vary according to the objectives of a deposit insurance system.

Recognizing that the government would rescue the banks and reimburse the depositors, more risk-loving banks might be attracted to enter the market. This is due to the fact, that there exist no differential costs in obtaining funds from the market among banks with good risk management or otherwise. A mandatory deposit insurance mitigates this adverse selection among banks (Demirguc-Kunt & Detragiache, 2002). Eventually, it would reduce the undesirable outcome where solvent and stable banks could lose their market share to the unstable banks due to regulatory arbitrage.

Likewise, with the implementation of deposit insurance, the depositors might not have the incentive to monitor the banks' activities or check their solvency. A low coverage amount is less effective in restoring depositors’ confidence and might defeat the purpose of having a deposit insurance framework where bank runs could occur. However, moral hazard problem could be greater with a higher coverage amount specified. Hence, an effective coverage amount should be in place to balance between restoring depositors’ confidence and reducing moral hazard. One could also argue that without explicit deposit insurance the depositors would diligently monitor the banks' activities (Hadad et al., 2011) and avoid depositing money with a fragile bank to avoid bearing risk in the event of the bank’s failure.

In the early stages of introducing explicit deposit insurance system, most countries introduced an insurance premium that did not commensurate with risk. Hence, the moral

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hazard problem became worse, as there is no incentive for banks to avoid excessive risk in their portfolio. Literature suggests that the risk-based premium method could mitigate the moral hazard problem (see for example Cull, Senbet, & Sorge, 2005; Demirguc-Kunt & Detragiache, 2002; Demirguc-Kunt & Huizinga, 2004). The International Association of Deposit Insurance survey as at 9th September 2011, revealed that only 24 countries including Malaysia, introduced a risk-based deposit insurance premium replacing the flat rate premium to mitigate the moral hazard problem. A sensitive risk-based premium towards bank risk would prompt the insured banks to think twice before embarking in a higher risk activity as the higher the risk in their asset portfolio the higher the premium the insured banks have to pay. This is seen as some sort of penalty to the banks if they divulge in risky activities. In addition, it is believed that because of this penalty, banks would have the incentives to improve their risk management practices.

In many countries, especially prior to the 1998 financial crisis, there usually existed an unofficial or also known as the implicit deposit insurance system. This situation also applies to Malaysia. Malaysia only introduced an explicit deposit insurance system on 1 September 2005. Prior to that, there existed an implicit deposit insurance system. In addition, the insurance premium was not risk rated until in 2008. In practice, whenever appropriate, countries modify the original design features of their deposit insurance system to ensure that the new and better design could be an effective tool to mitigate the moral hazard problem. Similarly, the introduction of a credible(see Bank for International Settlements & International Association of Deposit Insurers, 2009; International Association of Deposit Insurers, 2008) explicit deposit insurance system is pertinent to not only limiting the government’s commitment to depositors, but also mitigating moral hazard problem, thereby ensuring increased financial intermediation of the banking system. Thus,

the design of deposit insurance is crucial in ensuring banking stability rather than the duration of the deposit insurance system implementation itself.

It is obvious that the institutional structure of deposit insurance system coupled with prudential supervision and regulation (Demirguc-Kunt & Detragiache, 2002) exert an important function in mitigating moral hazard problem to ensure financial stability. If financial instability other than bank runs cause bank failures, then it cannot be concluded that deposit insurance system was unsuccessful. Bank failures could be due to many other external factors like bad economic environment, political instability, or non- credible design of the existing deposit insurance system and thus more prone to banking instabilities.