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The adoption of explicit deposit insurance increases the moral hazard of bank’s risktaking triggered by the reduction in depositors’ discipline. In the light of economic and contract theories, the main objectives of this study are; to analyze whether the implementation of risk-adjusted deposit insurance premium shrinks the bank’s risktaking, to examine that the allocation of appropriate supervisory powers and suitable supervision structure to a banking supervisor reduces the bank’s risk-taking, to scrutinize whether to allocate the additional supervisory power to a deposit insurer in the presence of banking supervisor which more likely to decreases the moral hazard of bank’s risk-taking. This study comprises the secondary data of publically traded deposit-taking banks of 125 countries from 2002 to 2014 period. In this scenario, the bank-level data is collected from the Bankscope database while country-level data is collected from the surveys of World Bank and global financial development database. This study uses the Hierarchical Linear Modelling (HLM) technique which takes into account the nested effect of the dataset. The findings reveal that enactment of risk-adjusted deposit insurance premium decreases the moral hazard of bank’s risk-taking initiated by the adoption of explicit deposit insurance. Though, this effect is higher for the small banks as compared to large banks. Furthermore, the allocation of greater supervisory powers to a banking supervisor, reduces the moral hazard of bank’s risk-taking in non-crisis affected countries and uplifts the financial health of banks in both crisis and non-crisis affected countries. Moreover, a central bank with greater supervisory powers, appears to mitigate the moral hazard of bank’s risk-taking adopted by explicit deposit insurance. Whereas, the allocation of low supervisory powers to a central bank has a little or no impact on the bank’s risk-taking. The allocation of supervisory powers to a deposit insurer decreases the moral hazard of bank’s risk-taking and enriches the bank’s soundness in non-crisis effected countries. Furthermore, the allocation of additional supervisory powers to a deposit insurer, appears as the additional force to mitigate the moral hazard of bank’s risk-taking in the presence of a banking supervisor. However, this effect is more significant in non-crisisaffected countries. Therefore, the regulatory institutes can reform their strategies and surveillance policies under the verdicts of this study, as it intensifies the depositors and investors’ confidence in the banking system around the globe.
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