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Bank capital, liquidity creation and deposit insurance

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Author Info

  • Fungacova, Zuzana

    ()
    (BOFIT)

  • Weill, Laurent

    (BOFIT)

  • Zhou, Mingming

    (BOFIT)

Abstract

This paper examines how the introduction of deposit insurance influences the relationship between bank capital and liquidity creation. As discussed by Berger and Bouwman (2009), there are two competing hypotheses on this relationship which can be influenced by the presence of deposit insurance. The introduction of a deposit insurance scheme in an emerging market, Russia, provides a natural experiment to investigate this issue. We study three alternative measures of bank liquidity creation and perform estimations on a large set of Russian banks. Our findings suggest that the introduction of the deposit insurance scheme exerts a limited impact on the relationship between bank capital and liquidity creation and does not change the negative sign of the relationship. The implication is that better capitalized banks tend to create less liquidity, which supports the “financial fragility/crowding-out” hypothesis. This conclusion has important policy implications for emerging countries as it suggests that bank capital requirements implemented to support financial stability may harm liquidity creation.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/DP1710.pdf
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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 17/2010.

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Length: 35 pages
Date of creation: 05 Nov 2010
Date of revision:
Handle: RePEc:hhs:bofitp:2010_017

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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Web page: http://www.suomenpankki.fi/bofit_en/
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Related research

Keywords: bank capital; liquidity creation; deposit insurance; Russia;

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References

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  1. Zuzana Fungácová & Laura Solanko & Laurent Weill, 2010. "Market power in the russian banking industry," Economie Internationale, CEPII research center, issue 124, pages 127-146.
  2. von Thadden, Ernst-Ludwig, 2004. "Bank capital adequacy regulation under the new Basel Accord," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 90-95, April.
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Cited by:
  1. Horváth, Roman & Seidler, Jakub & Weill, Laurent, 2012. "Bank capital and liquidity creation: Granger-causality evidence," Working Paper Series 1497, European Central Bank.

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