Does Directors and Officers' Liability Insurance Induce Bank Risk-taking? Evidence from Taiwan

This study investigates the effect of directors and officers' (D&O) insurance on bank risk-taking. Using data from Taiwan banks, we find that: (i) the level of D&O insurance coverage is positively associated with risk-taking; and (ii) this positive relationship is less pronounced for banks whose insurers are highly credit-rated or specialists in the D&O insurance market. Overall, considering the severe consequences of greater bank risk-taking, our findings highlight the need for regulators to monitor the use of D&O insurance policies by banks.