TITLE:
Effects of Deposit Insurance on Self-Discipline of Bank Franchise Value
AUTHORS:
Yaozong Zhao
KEYWORDS:
Bank’s Franchise Value, Explicit Deposit Insurance System, Implicit Deposit Insurance System, Listed Bank, Risk
JOURNAL NAME:
American Journal of Industrial and Business Management,
Vol.7 No.3,
March
29,
2017
ABSTRACT: Foreign research has shown that the bank franchise value is the important
mechanism of the bank’s risk self-discipline. However, the relationship between
the franchise value and the risk behavior of our bank must be based on our
special financial background. Before the implementation of explicit deposit
insurance system in China, there has been an implicit deposit insurance system
guaranteed by the government. The traditional literature suggests that the
implicit deposit insurance system provides a strong guarantee for commercial
banks, which may weaken the risk discipline effect of the bank’s franchise value,
and the reasonable explicit deposit insurance system is superior to the
implicit deposit insurance system. In the financial context of the explicit
deposit insurance system, the self-discipline effect of the franchise value
will be repaired. Based on the reality of establishing an explicit deposit
insurance system in China, this paper uses the Tobin Q value to measure the franchise value of 16 listed banks in
China. The relationship between the franchise value and risk of bank before and
after the introduction of explicit deposit insurance is studied by using panel
data model. The results show that before the implementation of the explicit
deposit insurance system, the self-discipline effect of the franchise value is
completely ineffective in the context of the government-guaranteed implicit deposit
insurance system. The cross-item coefficient of the explicit deposit insurance
system and the franchise value is significantly negative. It shows that the
implementation of the explicit deposit insurance system has played a role in
restoring the self-discipline effect of the bank’s franchise value.