Shields or illusions? The role of deposit insurance in mitigating bank risk amid uncertainty across financial crises in Asia

Purpose This study aims to examine the linear and non-linear relationships between uncertainty (WUI) and bank risk, highlighting the moderating role of deposit insurance schemes during the crisis and enriching the literature on systemic risk and financial safety nets. Design/methodology/approach The authors analyse unbalanced panel data on 274 listed banks across 10 Asian countries from 2003 to 2022, sourced from OSIRIS, annual reports and the World Bank. The analysis methods include ordinary least squares, fixed- and random-effects models and two-step generalised method of moments to address endogeneity and ensure robust results. Findings WUI exhibits a non-linear relationship with bank risk, where risk increases at moderate uncertainty but decreases at extreme uncertainty due to banks’ prudent behaviour. Deposit insurance schemes generally reduce risk, but at the beginning of a crisis, they can induce moral hazard and increase risk before stabilising as uncertainty peaks. However, the interaction between WUI, crisis and deposit insurance exhibits complex non-linear dynamics. Research limitations/implications The findings offer new empirical insights from the Asian region on economic uncertainty, deposit insurance and banking risk management. Methodologically, this study uses a non-linear and interactive approach to illustrate the complexity of bank risk dynamics. From a policy perspective, this study recommends (1) designing a flexible deposit insurance system to maintain stability without triggering moral hazard, (2) strengthening banking supervision and transparency and (3) developing a crisis response framework that is adaptive to changing levels of uncertainty. This study provides important insights into the relationship between WUI, the presence of deposit guarantee schemes, and banking risk levels in Asia. While the approach is comprehensive, there is still room for improvement. This study is limited to Asian countries; future research is recommended to expand the geographic scope and examine the effectiveness of guarantees based on protection coverage, funding mechanisms, compensation limits and institutional aspects such as bank supervision and governance quality. Practical implications Deposit insurance should be designed adaptively, with stronger supervision and risk controls during periods of elevated uncertainty. Banks should also adjust credit, liquidity and internal risk-management practices according to changing uncertainty conditions. Originality/value This study contributes by linking WUI, deposit insurance and banking crises to examine banking risk, providing new empirical evidence from Asian countries.