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Deposit Insurance and Bank Liquidity Creation: Evidence from a Natural Experiment in China

Author

Listed:
  • Xiangyi Zhou

    (Xi’an Jiaotong University)

  • Xinyue Li

    (Xi’an Jiaotong University, Standard Chartered Bank (China) Limited)

  • Yifan Zhou

    (University of Leicester)

  • Alper Kara

    (Brunel University London)

Abstract

In this paper, we examine how the implementation of deposit insurance influences the impact of bank capital, excess lending, banking competition and monetary policy on liquidity creation of banks. Our examination uses China’s introduction of deposit insurance in 2015 as a natural experiment. We find that deposit insurance positively reinforces the effect of capital but weakens that of monetary policy on liquidity creation. We do not find that deposit insurance has a significant influence on the effects of excess lending and competition on the liquidity creation of banks. We also show that the implementation of deposit insurance has heterogenous effects on the liquidity creation of large and small banks.

Suggested Citation

  • Xiangyi Zhou & Xinyue Li & Yifan Zhou & Alper Kara, 2025. "Deposit Insurance and Bank Liquidity Creation: Evidence from a Natural Experiment in China," Journal of Financial Services Research, Springer;Western Finance Association, vol. 67(3), pages 101-137, June.
    • Handle: RePEc:kap:jfsres:v:67:y:2025:i:3:d:10.1007_s10693-024-00431-z
    DOI: 10.1007/s10693-024-00431-z
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