The effect of deposit insurance on risk-taking: An empirical study of city commercial banks

Based on micro-level data of 140 commercial banks in China’s banking industry from 2009 to 2018, this paper employs a difference-in-difference methodology to study the impact of deposit insurance regulations promulgated by the State Council in 2015 on bank risk. The empirical results show that compared to the six major state-owned commercial banks, the deposit insurance implementation significantly increases the risk of city commercial banks and the parallel trend assumptions are also verified. In terms of mechanism, the deposit insurance has significantly increased the city commercial banks’ profit pressure on traditional deposit and loan business and thus has increased the motivation of city commercial banks to conduct aggressive business strategy and engage in high-risk activities. Our findings also support that the moral hazard incentives of deposit insurance can increase the risk exposure of city commercial banks. In particular, the deposit insurance system plays a relatively greater role in city commercial banks who are non-state-owned, smaller-scale, unlisted and have more concentrated stock structure. © 2023 Systems Engineering Society of China. All rights reserved.