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The effect of deposit insurance on market discipline: Evidence from a natural experiment on deposit flows

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  • Karas, Alexei

    ()
    (BOFIT)

  • Pyle, William

    (BOFIT)

  • Schoors, Koen

    (BOFIT)

Abstract

We explore how the introduction of explicit deposit insurance affects deposit flows into and out of banks of varying risk levels. Using evidence from a natural experiment in Russia, we employ a difference-in-difference estimator to isolate the change in the deposit flows of a newly insured group (households) relative to an uninsured “control” group (firms). This approach improves on earlier studies seeking to identify the effect of deposit insurance on market discipline. We find that the relative sensitivity of households to bank capitalization diminished markedly with the introduction of an insurance program covering their deposits. This was not true for firms, however. We then show the finding is not an artifact of the two groups responding differently to a minor banking crisis that arose at roughly the same time.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 8/2010.

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Length: 32 pages
Date of creation: 19 Jun 2010
Date of revision:
Handle: RePEc:hhs:bofitp:2010_008

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Web page: http://www.suomenpankki.fi/bofit_en/
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Keywords: deposit insurance; market discipline;

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  1. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
  2. Alexei Karas & William Pyle & Koen Schoors, 2009. "The Effect of Deposit Insurance on Market Discipline:Evidence from a Natural Experiment on Deposit Flows," Middlebury College Working Paper Series 0905, Middlebury College, Department of Economics.
  3. Soest, A.H.O. van & Peresetsky, A. & Karminsky, A.M., 2003. "An Analysis of Ratings of Russian Banks," Discussion Paper 2003-85, Tilburg University, Center for Economic Research.
  4. Timothy H. Hannan & Gerald A. Hanweck, 1986. "Bank insolvency risk and the market for large certificates of deposit," Working Papers in Banking, Finance and Microeconomics 86-1, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Karas, Alexei & Pyle, William & Schoors, Koen, 2010. "The effect of deposit insurance on market discipline: Evidence from a natural experiment on deposit flows," BOFIT Discussion Papers 8/2010, Bank of Finland, Institute for Economies in Transition.
  2. Disli, Mustafa & Schoors, Koen & Meir, Jos, 2013. "Political connections and depositor discipline," Journal of Financial Stability, Elsevier, vol. 9(4), pages 804-819.

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