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THE WORLD BANK ECONOMIC REVIEW, VOL. 16, NO. 1, 109-137
© 2002 International Bank for Reconstruction and Development / The World Bank

Article

Bank Risk and Deposit Insurance

Luc Laeven

Luc Laeven is with the World Bank, Financial Sector Department, Financial Sector Strategy and Policy Unit. His e-mail address is llaeven{at}worldbank.org.

Abstract

Arguing that a relatively high cost of deposit insurance indicates that a bank takes excessive risks, this article estimates the cost of deposit insurance for a large sample of banks in 14 economies to assess the relationship between the risk-taking behavior of banks and their corporate governance structure. The results suggest that banks with concentrated ownership tend to take the greatest risks, and those with dispersed ownership engage in a relatively low level of risk taking. Moreover, as a proxy for bank risk, the cost of deposit insurance has some power in predicting bank distress.


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