Safe Haven or Regulatory Arbitrage Shusen Qi Maastricht University Xiamen University Stefanie Kleimeier Maastricht University Open Universiteit University of Stellenbosch Business ID: 592456
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Deposit Insurance in Times of CrisesSafe Haven or Regulatory Arbitrage?
Shusen QiMaastricht University; Xiamen UniversityStefanie KleimeierMaastricht University; Open Universiteit; University of Stellenbosch Business SchoolHarald SanderTechnische Hochschule Köln; Maastricht School of ManagementIADI 2017 Biennial Research ConferenceJune 1-2, 2017Slide2
The Rise and Retrenchment of CBDSlide3
The Uneven Geography
of CBDSlide4
Where Do We StandDeposit insurance influences
attractiveness of national banking market DI directly protects depositor by reducing bank runs and increasing banking stability (Diamond & Dybvig, 1983)DI introduces bank moral hazard and decreases banking stability (Demirgüç-Kunt & Detragiache, 1997, 2002; Rossi, 1999)Limited empirical evidence Lane & Sarisoy (2000): private capital inflows to developing countries are unrelated to explicit DI Huizinga & Nicodème (2006): non-bank external liabilities increase after introduction of an explicit DI, specific DI features do not matterSlide5
What Questions Do We AskDoes deposit
insurance (DI) matter to cross-border depositors, including explicit DI and DI design features?Are cross-border depositors attracted by safe havens or do they engage in regulatory arbitrage?Does this behaviour change between stable and crisis times?
What effects did emergency actions of 2008/09 crisis have on cross-border depositors
?Slide6
What Do We FindExistence of explicit DI and DI
design features matter for CBDIn stable times, both “Safe Haven” and “Regulatory Arbitrage” matterIn times of crises, DI acts primarily as a “Safe Haven” and stimulates “Regulatory Arbitrage” only to a limited extentEmergency actions during 2008/09 crisis maintain the safe havens and have led to substantial relocations of cross-border depositsSlide7
Data: BIS locational banking statistics22
bank countries, 131 customer countriesBilateral Principle of residenceCross-border deposits from non-bank customersOutstanding volumes adjusted for exchange rate changesAnnual data 1998-2011Testing Safe Haven, Regulatory Arbitrage and Crisis Hypothesis: 1998-2007Testing Emergency Action Hypothesis: 1998-2011 / 2006-2009Slide8
Data: Deposit Insurance Slide9
Data: Deposit Insurance in 2006 Slide10
Data: Deposit Insurance in 2006 Slide11
Data: Deposit Insurance in 2006 Slide12
Data: Systemic Banking CrisesSystemic banking crises A country’s corporate and financial sectors experience a large number of defaults and financial institutions and corporations face great difficulties repaying contracts on time
Laeven & Valencia (2008, 2010, 2012)CountriesStart/end of crisesCrises from 1998-2007Only in depositor countriesCrisis of 2008/09Both in bank and depositor countriesSlide13
Hypothesis 1H1: Safe Haven Hypothesis
Compared to bank countries without an explicit DI, the existence of an explicit DI makes a bank country more attractive for cross-border depositors. In addition, the attractiveness of a bank country for cross-border depositors increases with the strength of its DI scheme relative to the strength of other bank countries’ DI schemesSlide14
Introduction of explicit DI ⇒
82% increase in CBD+1 unit DI power ⇒ +3% CBD+1 unit DI moral hazard mitigation ⇒ +5% CBD+1 unit DI coverage intensity ⇒ +7% CBD+10 % DI coverage limit⇒ +5.5% CBDSlide15Slide16Slide17
Hypothesis 2H2: Regulatory Arbitrage Hypothesis
The existence of an explicit DI makes a bank country attractive for cross-border depositors from countries that lack an explicit DI. In addition, the attractiveness of a bank country for cross-border depositors increases with the strength of bank country’s DI scheme relative to the strength of depositor country’s DI schemeSlide18Slide19
Hypothesis 3H3: Safe Haven in Crisis Hypothesis
The importance attributed by cross-border depositors to the existence and strength of the bank country’s DI increases when depositors experience a banking crisis at homeSlide20Slide21
Hypothesis 4H4: Regulatory Arbitrage in Crisis Hypothesis
The importance attributed by cross-border depositors to the existence and strength of the bank country’s DI relative to the depositor country’s DI increases when depositors experience a banking crisis at homeSlide22Slide23
Hypothesis 5H5: Emergency Actions Hypothesis
The emergency actions taken by the bank country regarding its explicit DI ensure that the bank country remains an attractive safe haven for cross-border depositors Slide24Slide25
What Do We FindExistence of explicit DI and DI
design features matter for CBDIn stable times, both “Safe Haven” and “Regulatory Arbitrage” matterIn times of crises, DI acts primarily as a “Safe Haven” and stimulates “Regulatory Arbitrage” only to a limited extentEmergency actions during 2008/09 crisis maintain the safe havens and have led to substantial relocations of cross-border depositsSlide26
What Are the Policy ImplicationsDI schemes as well as emergency actions have sizeable effects on other countries in a financially
interdependent worldCall for coordination among national regulators with respect to DI schemes and emergency actions Especially countries with a high level of credibility should therefore also show a similar high level of global (and regional) responsibility in their actionsOur results are therefore also offering important insights for the controversially discussed design of a European deposit insurance scheme