Risk-based deposit insurance, deposit rates and bank failures: Evidence from Russia

Using the Russian banking system as a laboratory, we study the effect of a switch from fixed-rate deposit insurance to a risk-based system with premia tied to insured deposit rates offered by a bank. After the switch, increases in bank risk lead to reduced reliance on insured deposits, private banks without excessive capital stop raising insured deposit rates to fund loan growth, and the cost of insured deposits becomes a predictor of bank failures (beyond the CAMEL variables). Offering insured deposit rates notably above the market becomes a last resort to banks. The results suggest that risk-based deposit insurance schemes discouraging high insured deposit rates may help reduce bank moral hazard and improve financial stability.