Deposit insurance, crisis, and risk taking in ASEAN banks

This study tests the role of deposit insurance on banks' risk-taking behaviour and systemic risk in five ASEAN countries during the 2007-2008 crisis period. After controlling banks' specific and macroeconomic factors, this study reveals that the presence of such a guarantee significantly reduces banks' risk-taking and banks' systemic risk in the region. The study also uncovers the negative effect of crisis on banking stability; it appears that when the guarantee is applied during the crisis period, it reduces banks' systemic risk. The findings of this study are consistent with the objective of implementing a deposit insurance system in banks as a means to avoid bank runs and to protect banks from systemic risk, especially during economic downturns. Such a policy can help to decrease bank risk whilst increasing bank stability.