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Deposit insurance, institutions and bank interest rates

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  • Francesca Carapella
  • Giorgio Di Giorgio

    ()
    (Luiss University - Facoltà di Economia)

Abstract

Many recent institutional reforms of the financial system have relied on the introduction of an explicit scheme of Deposit Insurance. This instrument aims at two main targets, contributing to systemic stability and protecting depositors. However it may also affect the interest rate spread in the banking system, which can be viewed as an indicator of market power in this financial segment. This paper provides an empirical investigation of the effect of deposit insurance and other institutional and economic variables on bank interest rates across countries. We find that deposit insurance increases the lending borrowing spread in banking. The main effect seems to arise not from the deposit side though, but from an increase in the lending rate. We interpret this result as evidence of the presence of moral hazard problems related to this instrument. We also find that higher quality of institutions is associated with lower spreads, thus contributing to eroding sources of market power in the banking sector.

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File URL: http://www.econ.columbia.edu/RePEc/pdf/DP0304-06.pdf
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Bibliographic Info

Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0304-06.

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Length: 24 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:clu:wpaper:0304-06

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Cited by:
  1. Marcelin, Isaac & Mathur, Ike, 2014. "Financial development, institutions and banks," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 25-33.
  2. Ngalawa, Harold & Tchana Tchana, Fulbert & Viegi, Nicola, 2011. "Banking Instability and Deposit Insurance: The Role of Moral Hazard," MPRA Paper 31329, University Library of Munich, Germany.
  3. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics 662, University of Munich, Department of Economics.

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