Abstract
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.
Raheel Mumtaz, Imran Abbas Jadoon, Nadeem Sohail. (2019) Explicit Deposit Insurance and Bank Risk-Taking: Does Banking Supervision Matter?, Pakistan Journal of Commerce and Social Sciences, Volume 13, Issue 3.
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