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Political connections, bank deposits, and formal deposit insurance

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  • Nys, Emmanuelle
  • Tarazi, Amine
  • Trinugroho, Irwan

Abstract

This paper investigates the impact of banks’ political connections on their ability to collect deposits under two different deposit insurance regimes (blanket guarantee and limited guarantee). We use a unique hand-collected dataset that identifies the political connections of Indonesian commercial banks, from Q1:2002 to Q2:2008. We find that, regardless of their type (state-owned or private entities), politically connected banks are able to attract deposits more easily than their non-connected counterparts. We also show that this effect is more pronounced after the implementation of formal deposit insurance with limited coverage. Our findings have various policy implications. Formal deposit insurance might have improved market discipline, as highlighted by earlier studies, but it has also exacerbated the issue of political connections in the banking sector.

Suggested Citation

  • Nys, Emmanuelle & Tarazi, Amine & Trinugroho, Irwan, 2015. "Political connections, bank deposits, and formal deposit insurance," Journal of Financial Stability, Elsevier, vol. 19(C), pages 83-104.
    • Handle: RePEc:eee:finsta:v:19:y:2015:i:c:p:83-104
    DOI: 10.1016/j.jfs.2015.01.004
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    More about this item

    Keywords

    Banking; Political connections; Bank deposits; Funds; Deposit insurance system; Indonesia;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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