Spread of Deposit Insurance Since the 1970s : Greater deposit insurance generosity produces greater lending & a greater proportion of mortgage loans, which are not offset by declines in banking system leverage

Calomiris, Charles W. and Chen, Sophia, The Spread of Deposit Insurance and the Global Rise in Bank Asset Risk Since the 1970s (December 6, 2018). https://ssrn.com/abstract=3297294

Abstract: We construct a new measure of deposit insurance generosity for many countries, empirically model the exogenous international influences on the adoption and generosity of deposit insurance and show the causal chain from the expansion of deposit insurance generosity to increased overall lending and mortgage loans, and more severe and frequent banking crises. Greater deposit insurance generosity produces greater lending and a greater proportion of mortgage loans, which are not offset by declines in banking system leverage. Increased overall lending and mortgage loans also produce a positive association between deposit insurance and the likelihood and severity of banking crises.

Keywords: deposit insurance, mortgage lending, banking crises, moral hazard
JEL Classification: G01, G18, G21, G28, F55, F65, E32

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Same authors' summary in Cato Institute: https://www.cato.org/publications/research-briefs-economic-policy/spread-deposit-insurance-global-rise-bank-asset-risk

For the past three decades, a vast amount of literature has developed on the adoption and expansion of deposit insurance and its role in increasing the systemic insolvency risk of banking systems. This literature has shown that the installation of deposit insurance or an expansion of its generosity tends to be associated with higher asset risk, higher leverage, and a greater probability of a banking crisis, suggesting that the rise of deposit insurance may be one of the contributors to the pandemic of unprecedentedly frequent and severe banking crises around the world.