Do high deposit interest rates signal bank default? Evidence from the Russian retail deposit market

This study investigates Russian banks' strategy of inflating deposit interest rates in attempt to raise additional funds before leaving the market. We use unique data on bank-level deposit interest rates for various maturities from 2015 to 2016, along with bank fundamentals. Unlike previous studies that rely on implicit deposit interest rates, we utilize data on actual interest rates offered by banks, observed by retail depositors. Our analysis focuses on the relationship between abnormally high deposit interest rates on long-term deposits (overstatement strategy) and the likelihood of bank failure within the subsequent 2-3 quarters. We show that banks offering excessively generous interest rates for deposits spanning 180-365 days serve as a significant signal of an increased probability of license withdrawal within 3 quarters. When confronted with a nearing default, banks assign the highest rates to the longestterm deposits with the maturity over one year in an urgent attempt to attract funds. However, interest rates that surpass the market average drastically raise the probability of bank failure within 2 quarters. Our paper is the first to examine the substantial increase in deposit interest rates as a predictor of bank failure in an emerging market.