The Effect of Deposit Insurance on Risk Taking in Asian Banks

  • Enerelt Enkhbold Asian Development Bank
  • Batnairamdal Otgonshar Origo Partners PLC


This paper uses a panel database of 401 banks in 31 Asian countries over the period from 2000 to 2010 to examine the effects of deposit insurance on banks’ risk-taking incentives. We find that risk-taking incentives vary with bank size and risks. In addition, differentiated premiums may not accurately reflect the level of risk that a bank poses. In the presence of a deposit insurance scheme, the pattern of the non-linear relationship between bank size and risk-taking significantly changes. Our results suggest that market discipline exercised by banks is stronger in the presence of mandatory deposit insurance scheme. Government-funded deposit insurance funds allow Asian banks to take a higher risk. A risk-based deposit insurance scheme functions more effectively in the countries with good regulatory framework and institutional quality.

Author Biographies

Enerelt Enkhbold, Asian Development Bank

Investment Officer

Batnairamdal Otgonshar, Origo Partners PLC
Research Articles