Volume 21, Issue 2 (6-2026)
J. Mon. Ec. 2026, 21(2): 227-265 |
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Hashemi Mehneh S M. Deposit Insurance, Central Bank Supervision, and Banking Stability: The Mediating Role of Moral Hazard. J. Mon. Ec. 2026; 21 (2) :227-265
URL: http://jme.mbri.ac.ir/article-1-753-en.html
URL: http://jme.mbri.ac.ir/article-1-753-en.html
PhD Candidate, Department of Financial Management, South Tehran Branch, Islamic Azad University, Tehran, Iran
Abstract: (1160 Views)
This study examines the interplay between deposit insurance, central bank supervision, and banking stability, emphasizing the mediating role of moral hazard. Deposit insurance, initially designed as a safeguard to prevent bank runs and protect depositors, may paradoxically undermine financial stability if implemented without adequate supervisory mechanisms. In such contexts, the assurance of depositor protection can encourage banks to engage in excessive risk-taking behavior, thereby increasing systemic vulnerability.Using a panel dataset of 118 countries over the period 1980–2004, the study employs a random-effects logistic regression model to evaluate how deposit insurance schemes, in interaction with credit expansion to the private sector (a proxy for moral hazard), influence the likelihood of banking instability. The analysis distinguishes between two types of instability—bank runs and bank insolvencies—to capture both liquidity-driven and solvency-driven crises.The findings reveal that deposit insurance alone does not have a statistically significant effect on banking stability; however, when combined with high levels of credit growth and weak regulatory oversight, it significantly increases the probability of banking crises. Moreover, the design features of deposit insurance—such as full coverage or government-funded mechanisms—exacerbate instability when central bank supervision is weak. The study concludes that effective coordination between deposit insurance systems and central bank oversight is essential to mitigate moral hazard and promote sustainable financial stability.
Keywords: Deposit insurance, central bank supervision, banking stability, moral hazard, financial regulation, systemic risk
Type of Study: Original Research - Theoric |
Subject:
Monetary Economics
Received: 6 Nov 2025 | Accepted: 1 Feb 2026 | Published: 6 Jun 2026
Received: 6 Nov 2025 | Accepted: 1 Feb 2026 | Published: 6 Jun 2026
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