Prague Economic Papers 2025, 34(3):278-303 | DOI: 10.18267/j.pep.893

How do financial inclusion, deposit insurance, and bank concentration affect bank stability?

Xiangyuan Yu ORCID..., Yiming Chang ORCID..., Jiaqi Li ORCID...
Xiangyuan Yu: School of Economics and Management, Beijing Jiaotong University, No. 3 Shangyuancun Haidian District, Beijing, PR China
Yiming Chang: (Corresponding Author), China Center for Information Industry Development, CCID Building, No. 66 Zizhuyuan Road, Haidian District, Beijing, PR China
Jiaqi Li: Melbourne Law School, The University of Melbourne

This study investigates the nonlinear interplay between bank stability, financial inclusion, deposit insurance design, and banking concentration, utilizing unbalanced panel data from 122 countries between 2004 and 2021. By constructing novel indices-including a composite Moralhazard index to quantify deposit insurance-related risk incentives, a financial inclusion indicator, and a CONTAGION measure to capture the contagion effect of deposit insurance, we provide fresh empirical insights into the institutional synergies and trade-offs shaping banking system resilience. Our analysis reveals three key results: (1) Threshold effects exist in both deposit insurance coverage and financial inclusion levels that significantly influence bank stability; (2) The interaction between deposit insurance spread and financial inclusion may mitigate moral hazard incentives from deposit insurance systems at the micro level, it simultaneously amplifies cross-border contagion risks at the macro level; (3) Heterogeneous cross-country evidence reconciling how higher banking concentration elevates banks' risk.

Keywords: bank risk, financial inclusion, deposit insurance, bank competition, industry concentration
JEL classification: G21, G22, G32

Received: August 7, 2024; Revised: June 3, 2025; Accepted: July 3, 2025; Published: October 29, 2025  Show citation

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Yu, X., Chang, Y., & Li, J. (2025). How do financial inclusion, deposit insurance, and bank concentration affect bank stability? Prague Economic Papers, 34(3), 278-303. doi: 10.18267/j.pep.893
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