Impact of Financial Market Development, Financial Crises and Deposit Insurance on Bank Risk

Abstract

This paper examines the impact of financial market development, financial crises and deposit insurance on bank risk based on macro data of 86 countries during the period 1998–2014. The results show that banking sector development and stock market development have opposing effects on bank risk measured as bank non-performing loan ratio. The introduction of an explicit deposit insurance system plays a significant role in reducing banks’ risk. However, the bank market development after the introduction of this system also increases banks’ risk. The impact of financial market development and deposit insurance system on banks’ risk was more significant before the 2008 financial crisis. It is found that there is a nonlinear relationship between financial market development, deposit insurance, financial crises and banks’ risk. The stock market development has an asymmetric effect on banks’ risk.