EFFECTS OF DEPOSIT INSURANCE SYSTEM ON BANKS’ RISK TAKING INCENTIVES IN TURKEY

Abstract

 Deposit insurance is an insurance system that guarantees bank deposits of people in case of bank failure or a run on the bank. Deposit insurance in Turkey is handled by Savings Deposit Fund Insurance and according to the latest regulations compensation limit covers a maximum of 100,000 TL per depositor per member institution. The system is adopted in most countries and has various advantages for both individuals and banks. However academic debates commonly focus on whether this system encourages banks to take excessive risks. In this context the purpose of this study is to analyze the link between deposit insurance and banks’ risk taking. For this purpose, a panel regression analysis is applied to the ratio of deposits under insurance to total deposits and basic risk measures of banks operating in Turkey during 2002Q4-2013Q1. Results suggest that, higher insured deposit ratios are related to higher credit risk and interest rate risk but lower liquidity risk and overall default risk.

Keywords

• Deposit insurance,banks’ risk taking,panel data regression

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