Deposit Insurance and Design: Effects on Bank Lending During the Global Financial Crisis

Abstract

This paper investigates how explicit deposit insurance scheme in place influence bank lending during the global financial crisis. Earlier studies find that banks tighten their lending to corporations, lend less to foreign borrowers (a “flight home” effect), and charge higher interest rates during the 2007-2009 crisis. This study shows that banks in countries with explicit deposit insurance are associated with smaller reductions in total lending and foreign lending, as well as smaller increases in corporate loan spreads and quicker post-crisis recovery. These effects are more pronounced for banks that heavily rely on deposit funding. Evidence also reveals that more generous or credible deposit insurance designs are associated with stronger stabilization effects on bank lending during the crisis.

Speaker profile

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Research Interests

• Banking
• Investments
• Credit default swaps
• Corporate finance
• International finance

Selected Publications

• Iftekhar Hasan, Gabriel Ramirez and Gaiyan Zhang (2019), “Lock-In Effects in Relationship Lending: Evidence from DIP Loans”, Journal of Money, Credit and Banking, 51(4), 1021-1043
• Hasan, Iftekhar, Yiwei Fang, Liuling Liu, and Gaiyan Zhang (2017), “Deposit Insurance and the 2008-2009 Global Financial Crisis,” Financial Stability Studies, 18, 1-19.
• Helwege, Jean and Gaiyan Zhang (2016), “Financial Firm Bankruptcy and Contagion”, Review of Finance (Financial Times Top 50 Journals), 20 (4): 1289-1320. 2 Cited in the Report of Committee on Capital Markets Regulation Selected by the Concluding Conference of the ESCB Macro-prudential Research (MaRs) Network at the European Central Bank (2014) Ranked in top-10-list by downloads at SSRN, Stock Market Risk, Econometric Modeling: Capital Markets
• Chen, Long, Gaiyan Zhang and Weina Zhang (2016), “Return Predictability in Corporate Bond Market along the Supply Chain”, Journal of Financial Markets, 29: 66-86. Ranked in top-10-list by downloads at SSRN, Asset Price Forecasts
• Liuling Liu, Gaiyan Zhang and Yiwei Fang (2016), “Bank CDS and Deposit Insurance around the World”, Journal of International Money and Finance, 69: 339-363.
• Hasan, Iftekhar, Liuling Liu and Gaiyan Zhang (2016), “Determinants of Global Bank Credit Default Swap Spreads”, Journal of Financial Services Research, 50(3): 275-309. Ranked in top-10-list by downloads at the Social Science Research Network (SSRN), Credit Risk
• Kanagaretnam, Kiridaran, Gaiyan Zhang, and Sanjian Bill Zhang (2016), “CDS Pricing and Accounting Disclosures: Evidence from U.S. Bank Holding Corporations around the Recent Financial Crisis”, Journal of Financial Stability, 22(February): 33-44.
• Lin, Ping, Sanjian Zhang and Gaiyan Zhang (2014), “Exploring Risk Containment Among Big-4 Firms Through Credit Derivatives”, International Journal of Services and Standards, 9(2), 146-174.
• Mintchik, Natalia, Ashley Wang and Gaiyan Zhang (2014), “Institutional investor preferences for analyst forecast accuracy: Which institutions care?” International Review of Accounting, Banking and Finance, 6(1).
• Tian, Suhua, Yunhong Yang and Gaiyan Zhang (2013), “Bank Capital, Interbank Contagion and Bailout Policy,” Journal of Banking and Finance, Vol. 37(8), August, 2765–2778. Ranked in top-10-list by downloads for: Global Banking, 2013 Ranked in top-10-list by downloads for: Responses to Financial Crisis, 2013
• Zhang, Gaiyan and Sanjian Zhang (2013), “Information Efficiency of Credit Default Swaps Market: Evidence from Earnings Surprisies”, Journal of Financial Stability, 9(4), December, 720-730.
• Eyssell, Tom, Hung-gay Fung and Gaiyan Zhang (2013), “Determinants and Price Discovery of China Sovereign Credit Default Swaps”, China Economic Review, a lead article, Vol. 24, March, 1-15.
• Fung, Hung-gay, Min-Ming Wen and Gaiyan Zhang (2012), “How Does the Use of Credit Default Swaps Affect Firm Risk and Value? Evidence from U.S. Life and Property-Casualty Insurance Companies”, Financial Management, 41(4), 979-1007.
• Fung, Hung-gay, Min-Ming Wen and Gaiyan Zhang (2012), “The Use of Credit Default 3 Swaps in the Insurance Industry: Evidence from U.S. Life and Property-Casualty Insurance Companies”, International Review of Accounting, Banking and Finance, 4(1), 20-50.

Working Papers

• Creditor Control Rights and Non-Synchronicity of Global Corporate CDS Excess Returns”, with Iftekhar Hasan, Miriam Marra and Eliza Wu The Investments Best Paper Award finalist of FMA-Asia 2019. sponsored by CFA Institute Asia Research Exchange
• Effects of Deposit Insurance on Bank Lending: Evidence from Global Banks during the 2008 Financial Crisis”, with Iftekhar Hasan, Liuling Liu and Anthony Sauders Best paper Award, the 2018 the Society of Interdisciplinary Business Research (SIBR)
• Conference Keynote Panelist discussion for the 2017 Canadian Deposit Insurance Corporation’s 50th Anniversary Meeting in Ottawa
• The Impact of Informed CDS Trading on Related Equity”, with Hung-gay Fung and MinMing Wen, Best Paper Award, the 2017 Financial Management Association (FMA), semifinalist
• Natural Disaster Experience and Risk-taking Behaviors: Evidence from Individual Investor Trading”, with Dien Giau Bui, Iftekhar Hasan, and Chih-Yung Lin