DOES DEPOSIT INSURANCE INDUCE MORAL HAZARD? AN EMPIRICAL STUDY WITH CREDIT UNIONS FROM THE STATE OF MINAS GERAIS
Keywords:Moral Hazard, Deposit Insurance, Credit Unions, Capital Adequacy
AbstractThe deposit insurance mechanism is aimed at the security and liquidity of the financial system. But, paradoxically, it may end up increasing the instability of the financial system as a result of themoral hazard problem. In fact, conflicting interests of the parties coupled with imperfect monitoringcan induce financial institutions under the protection of a deposit insurance system to run into morerisk than the level recommended by the fund manager. This study tested the hypothesis that the Deposits Guarantee Fund (FGD) has not induced the moral hazard problem, using a panel composed of 62% of credit unions in the state of Minas Gerais affiliated to the Sicoob-Crediminassystem from January 1995 to May 2008. We tested alternative specifications for panel data models using six proxies for the degree of risk exposure of cooperatives as suggested by the literature. Wefound that the preferred model is the fixed e ects model estimated by Feasible Generalized Least Squares. We could not reject the null hypothesis that the FGD has not induced moral hazard problems.
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How to Cite
Bressan, V. G. F., Braga, M. J., Resende Filho, M. de A., & Bressan, A. A. (2013). DOES DEPOSIT INSURANCE INDUCE MORAL HAZARD? AN EMPIRICAL STUDY WITH CREDIT UNIONS FROM THE STATE OF MINAS GERAIS. REGE Revista De Gestão, 19(3). https://doi.org/10.5700/issn.2177-8736.rege.2012.49914