Relationship of moral hazard with economic cryses under fully covered deposit insurance system

Since its financial reletionships, failure of a bank can cause big damages to an economy by triggering a chain reaction of other banks? failures. Governments announce full coverage to deposits in order to prevent this to happen. While deposit insurance is succesful in preventing bank runs, it encourages banks to take excessive risk because of the moral hazard problem. Moral hazard arises mostly in case of full coverage given to the deposits by the governments. When the moral hazard problem is solved the excessive risk taking is prevented and rising of the systematic risks are lowered.This study aims to adress the reasons that cause moral hazard problem in banking sector and investigates the methods to prevent or decrease it. In this context the effects of moral hazard problem to Turkish banking system after the full coverage given to deposits in case of to prevent bank runs during the crysis in Turkey in year 1994 is studied.Model is built in logit form with financial datas obtained from the banks between the years 1992-2008. According to results, it was concluded that the moral hazard that arised from the full coverage announced in 1994, was effective on causing 21 of 31 banks to fail.