IDEAS home Printed from https://ideas.repec.org/p/zbw/iwhdps/192019.html
   My bibliography  Save this paper

Flight from safety: How a change to the deposit insurance limit affects households' portfolio allocation

Author

Listed:
  • Damar, H. Evren
  • Gropp, Reint E.
  • Mordel, Adi

Abstract

We study how an increase to the deposit insurance limit affects households' portfolio allocation by exogenously reducing uninsured deposit balances. Using unique data that identifies insured versus uninsured deposits, along with detailed information on Canadian households' portfolio holdings, we show that households respond by drawing down deposits and shifting towards mutual funds and stocks. These outflows amount to 2.8% of outstanding bank deposits. The empirical evidence, consistent with a standard portfolio choice model that is modified to accommodate uninsured deposits, indicates that more generous deposit insurance coverage results in nontrivial adjustments to household portfolios.

Suggested Citation

  • Damar, H. Evren & Gropp, Reint E. & Mordel, Adi, 2019. "Flight from safety: How a change to the deposit insurance limit affects households' portfolio allocation," IWH Discussion Papers 19/2019, Halle Institute for Economic Research (IWH).
    • Handle: RePEc:zbw:iwhdps:192019
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/202030/1/1671896734.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rajkamal Iyer & Manju Puri, 2012. "Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks," American Economic Review, American Economic Association, vol. 102(4), pages 1414-1445, June.
    2. Guin, Benjamin & Brown, Martin & Morkötter, Stefan, 2015. "Deposit Withdrawals from Distressed Commercial Banks," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113081, Verein für Socialpolitik / German Economic Association.
    3. Cristian Badarinza & John Y. Campbell & Tarun Ramadorai, 2016. "International Comparative Household Finance," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 111-144, October.
    4. Raj Chetty & László Sándor & Adam Szeidl, 2017. "The Effect of Housing on Portfolio Choice," Journal of Finance, American Finance Association, vol. 72(3), pages 1171-1212, June.
    5. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 707-747, October.
    6. Charles W. Calomiris & Matthew Jaremski, 2019. "Stealing Deposits: Deposit Insurance, Risk‐Taking, and the Removal of Market Discipline in Early 20th‐Century Banks," Journal of Finance, American Finance Association, vol. 74(2), pages 711-754, April.
    7. H. Evren Damar & Reint Gropp & Adi Mordel, 2020. "Banks' Funding Stress, Lending Supply, and Consumption Expenditure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 685-720, June.
    8. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
    9. Hans-Martin Von Gaudecker, 2015. "How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?," Journal of Finance, American Finance Association, vol. 70(2), pages 489-507, April.
    10. Markus K. Brunnermeier & Stefan Nagel, 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals," American Economic Review, American Economic Association, vol. 98(3), pages 713-736, June.
    11. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January.
    12. Mark Egan & Ali Hortaçsu & Gregor Matvos, 2017. "Deposit Competition and Financial Fragility: Evidence from the US Banking Sector," American Economic Review, American Economic Association, vol. 107(1), pages 169-216, January.
    13. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    14. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    15. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    16. Carletti, Elena & De Marco, Filippo & Ioannidou, Vasso & Sette, Enrico, 2021. "Banks as patient lenders: Evidence from a tax reform," Journal of Financial Economics, Elsevier, vol. 141(1), pages 6-26.
    17. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 301-348.
    18. Shy, Oz & Stenbacka, Rune & Yankov, Vladimir, 2016. "Limited deposit insurance coverage and bank competition," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 95-108.
    19. David Xiao Chen & H. Evren Damar & Hani Soubra & Yaz Terajima, 2012. "An Analysis of Indicators of Balance-Sheet Risks at Canadian Financial Institutions," Bank of Canada Review, Bank of Canada, vol. 2012(Summer), pages 21-33.
    20. Christopher Martin & Manju Puri & Alexander Ufier, 2018. "Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance," NBER Working Papers 24589, National Bureau of Economic Research, Inc.
    21. Stephen Foerster & Juhani T. Linnainmaa & Brian T. Melzer & Alessandro Previtero, 2017. "Retail Financial Advice: Does One Size Fit All?," Journal of Finance, American Finance Association, vol. 72(4), pages 1441-1482, August.
    22. Ajay Khorana & Henri Servaes & Peter Tufano, 2009. "Mutual Fund Fees Around the World," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1279-1310.
    23. Jean-Noël Barrot, 2016. "Trade Credit and Industry Dynamics: Evidence from Trucking Firms," Journal of Finance, American Finance Association, vol. 71(5), pages 1975-2016, October.
    24. Franklin Allen & Elena Carletti & Itay Goldstein & Agnese Leonello, 2015. "Moral Hazard and Government Guarantees in the Banking Industry," Journal of Financial Regulation, Oxford University Press, vol. 1(1), pages 30-50.
    25. Franklin R. Edwards & Frederic S. Mishkin, 1995. "The decline of traditional banking: implications for financial stability and regulatory policy," Economic Policy Review, Federal Reserve Bank of New York, vol. 1(Jul), pages 27-45.
    26. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
    27. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
    28. Brown, Martin & Guin, Benjamin & Morkoetter, Stefan, 2013. "Deposit Withdrawals from Distressed Commercial Banks: The Importance of Switching Costs," Working Papers on Finance 1319, University of St. Gallen, School of Finance, revised Dec 2017.
    29. Golec, Pascal & Perotti, Enrico, 2017. "Safe assets: a review," Working Paper Series 2035, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    2. Brunetti, M. & Ciciretti, R. & Djordjevic, Lj., 2020. "Till mortgage do us part: Mortgage switching costs and household's bank switching," Journal of Banking & Finance, Elsevier, vol. 119(C).
    3. Firth, Chris, 2020. "Protecting investors from themselves: Evidence from a regulatory intervention," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    4. Matthias Horn & Andreas Oehler, 2020. "Automated portfolio rebalancing: Automatic erosion of investment performance?," Journal of Asset Management, Palgrave Macmillan, vol. 21(6), pages 489-505, October.
    5. Nicolás de Roux & Nicola Limodio, 2023. "Deposit Insurance and Depositor Behavior: Evidence from Colombia," The Review of Financial Studies, Society for Financial Studies, vol. 36(7), pages 2721-2755.
    6. Korniotis, George & Bonaparte, Yosef & Kumar, Alok, 2020. "Income Risk and Stock Market Entry/Exit Decisions," CEPR Discussion Papers 15370, C.E.P.R. Discussion Papers.
    7. Buss, Adrian & Vilkov, Grigory & Uppal, Raman, 2020. "Investor Sophistication and Portfolio Dynamics," CEPR Discussion Papers 15116, C.E.P.R. Discussion Papers.
    8. Jing Jian Xiao & Chunsheng Tao, 2020. "Consumer finance/household finance: the definition and scope," China Finance Review International, Emerald Group Publishing Limited, vol. 11(1), pages 1-25, June.
    9. John Y. Campbell, 2016. "Restoring Rational Choice: The Challenge of Consumer Financial Regulation," American Economic Review, American Economic Association, vol. 106(5), pages 1-30, May.
    10. Djordjevic, Ljubica, 2015. "Essays in household finance," Other publications TiSEM ad3edc86-915e-4ce8-ba38-b, Tilburg University, School of Economics and Management.
    11. Briggs, Joseph & Cesarini, David & Lindqvist, Erik & Östling, Robert, 2021. "Windfall gains and stock market participation," Journal of Financial Economics, Elsevier, vol. 139(1), pages 57-83.
    12. Hans K. Hvide & Tom G. Meling & Magne Mogstad & Ola L. Vestad, 2021. "Broadband internet and the stock market investments of individual investors," Discussion Papers 946, Statistics Norway, Research Department.
    13. Baeckström, Ylva & Marsh, Ian W. & Silvester, Joanne, 2021. "Variations in investment advice provision: A study of financial advisors of millionaire investors," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 716-735.
    14. Milo Bianchi, 2018. "Financial Literacy and Portfolio Dynamics," Journal of Finance, American Finance Association, vol. 73(2), pages 831-859, April.
    15. Carletti, Elena & Leonello, Agnese & Marquez, Robert, 2023. "Loan guarantees, bank underwriting policies and financial stability," Journal of Financial Economics, Elsevier, vol. 149(2), pages 260-295.
    16. Oehler, Andreas & Wanger, Hans Philipp, 2020. "Household portfolio optimization with XTFs? An empirical study using the SHS-base," Research in International Business and Finance, Elsevier, vol. 51(C).
    17. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    18. Kristian Blickle & Markus K. Brunnermeier & Stephan Luck, 2022. "Who Can Tell Which Banks Will Fail?," NBER Working Papers 29753, National Bureau of Economic Research, Inc.
    19. Anderson, Haelim & Copeland, Adam, 2023. "Information management in times of crisis," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 35-49.
    20. Stenbacka, Rune & Takalo, Tuomas, 2019. "Switching costs and financial stability," Journal of Financial Stability, Elsevier, vol. 41(C), pages 14-24.

    More about this item

    Keywords

    deposit insurance; banking; households; regulation;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:iwhdps:192019. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/iwhhhde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.