The Impact of Explicit Deposit Insurance on Market Discipline
AbstractThis paper studies the impact of explicit deposit insurance on market discipline in a framework that resembles a natural experiment.We improve upon previous studies by exploiting a unique combination of country-specific circumstances, design features, and data availability that allows us to distinguish between demand and supply effects.We show that deposit insurance causes a significant reduction in market discipline.We also show that the effect of deposit insurance depends on the coverage rate.When the coverage rate is more than 60 percent, market discipline is significantly reduced and it is completely eliminated when the coverage rate reaches 100 percent.Our results also suggest that most market discipline comes from large depositors and that the introduction of deposit insurance affected mainly those who were already active in imposing discipline.Our findings emphasize the need for binding coverage limits per depositor, high degrees of co-insurance, and "tailor made" deposit insurance systems that preserve the incentives of a critical mass of depositors that are willing and able to perform this function.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2006-5.
Date of creation: 2006
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market discipline; deposit insurance; deposit insurance coverage;
Other versions of this item:
- Vasso P. Ioannidou & Jan de Dreu, 2005. "The impact of explicit deposit insurance on market discipline," Proceedings 992, Federal Reserve Bank of Chicago.
- Vasso Ioannidou & Jan de Dreu, 2006. "The Impact of Explicit Deposit Insurance on Market Discipline," DNB Working Papers 089, Netherlands Central Bank, Research Department.
- F30 - International Economics - - International Finance - - - General
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-19 (All new papers)
- NEP-FIN-2006-02-19 (Finance)
- NEP-FMK-2006-02-19 (Financial Markets)
- NEP-IAS-2006-02-19 (Insurance Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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