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Market Discipline and Deposit Insurance Reform in Japan

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  • Masami Imai

    ()
    (Economics and East Asian Studies, Wesleyan University)

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    Abstract

    On April 1, 2002, the Japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits. This paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline. I find that the reform raised the sensitivity of interest rates on deposits, and that of deposit quantity to default risk. In addition, the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks. These results suggest that the deposit insurance reform enhanced market discipline in Japan. I also find that too-big-to-fail (TBTF) policy became a more important determinant of interest rates and deposit allocation after the reform, thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline.

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    File URL: http://dx.doi.org/10.1016/j.jbankfin.2006.01.009
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    Bibliographic Info

    Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2006-007.

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    Length: 32 pages
    Date of creation: Jan 2006
    Date of revision:
    Publication status: Published in the Journal of Banking and Finance (Volume 30, Issue 12 , December 2006, Pages 3433-3452)
    Handle: RePEc:wes:weswpa:2006-007

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    Keywords: Deposit Insurance; Market Discipline; Japanese Banks;

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    References

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    Cited by:
    1. Shimizu, Katsutoshi, 2009. "Is the information produced in the stock market useful for depositors?," Finance Research Letters, Elsevier, Elsevier, vol. 6(1), pages 34-39, March.
    2. Hakenes, Hendrik & Schnabel, Isabel, 2004. "Banks without Parachutes -- Competitive Effects of Government Bail-out Policies," Sonderforschungsbereich 504 Publications 04-53, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    3. De Giuli, Maria Elena & Maggi, Mario Alessandro & Paris, Francesco Maria, 2009. "Deposit guarantee evaluation and incentives analysis in a mutual guarantee system," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1058-1068, June.
    4. M. Disli & K. Schoors, 2013. "Bank rebranding and depositor loyalty," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 13/867, Ghent University, Faculty of Economics and Business Administration.
    5. Guizani, Brahim, 2010. "Regulation Policy And Credit Crunch: Evidence From Japan," MPRA Paper 46827, University Library of Munich, Germany, revised 08 May 2013.
    6. Emmanuelle Nys & Amine Tarazi & Irwan Trinugroho, 2013. "Political Connections, Bank Deposits, and Formal Deposit Insurance: Evidence from an Emerging Economy," Working Papers hal-00916513, HAL.
    7. Pop, Adrian & Pop, Diana, 2009. "Requiem for market discipline and the specter of TBTF in Japanese banking," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1429-1459, November.
    8. Masami Imai, 2008. "Crowding-Out Effects of a Government-Owned Depository Institution: Evidence from a Natural Experiment in Japan," Wesleyan Economics Working Papers 2008-003, Wesleyan University, Department of Economics.
    9. Baba, Naohiko & Inada, Masakazu, 2009. "Why do Japanese regional banks issue subordinated debts?," Japan and the World Economy, Elsevier, Elsevier, vol. 21(4), pages 358-364, December.
    10. Imai, Masami & Takarabe, Seitaro, 2011. "Transmission of liquidity shock to bank credit: Evidence from the deposit insurance reform in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 25(2), pages 143-156, June.
    11. Uchida, Hirofumi & Satake, Mitsuhiko, 2009. "Market discipline and bank efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 792-802, December.
    12. Brahim Guizani & Wako Watanabe, 2010. "The Deposit Insurance and the Risk-Shifting Incentive Evidence from the Blanket Deposit Insurance in Japan," Keio/Kyoto Joint Global COE Discussion Paper Series, Keio/Kyoto Joint Global COE Program 2010-004, Keio/Kyoto Joint Global COE Program.

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