IDEAS home Printed from https://ideas.repec.org/a/oup/rcorpf/v12y2023i2p291-325..html

Deposit Insurance Premiums and Bank Risk

Author

Listed:
  • Edward T Kim
  • Marcelo Rezende

Abstract

Deposit insurance premiums impose costs on banks’ balance sheets, narrowing profit margins and inducing banks to “search for yield.” This paper estimates the effects of deposit insurance premiums on bank portfolio rebalancing using supervisory data and a kink in the insurance premium schedule. We show that deposit insurance premiums weaken banks’ demand for reserves (a liquid asset with no credit risk) and strengthen the supply of short-term interbank loans (a less liquid asset with credit risk). We discuss the implications of these findings for optimal deposit insurance pricing. (JEL G21, G28)

Suggested Citation

  • Edward T Kim & Marcelo Rezende, 2023. "Deposit Insurance Premiums and Bank Risk," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(2), pages 291-325.
    • Handle: RePEc:oup:rcorpf:v:12:y:2023:i:2:p:291-325.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rcfs/cfad004
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
    2. repec:bla:jfinan:v:44:y:1989:i:5:p:1313-33 is not listed on IDEAS
    3. Allen, Franklin & Carletti, Elena & Marquez, Robert, 2015. "Deposits and bank capital structure," Journal of Financial Economics, Elsevier, vol. 118(3), pages 601-619.
    4. Gara Afonso & Roc Armenter & Benjamin Lester, 2019. "A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 177-204, July.
    5. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ni, Tingting & Ren, Yi & Choi, Junghwan, 2024. "Deposit insurance system and commercial bank profitability: A quasi-natural experiment based on the deposit insurance regulations," Finance Research Letters, Elsevier, vol. 67(PA).
    2. Lastrapes, William D. & Wiesen, Thomas F.P., 2025. "Regional bank failures and volatility transmission," Journal of Financial Stability, Elsevier, vol. 78(C).
    3. So, Jacky Yuk-Chow & Yao, Shuai & Wu, Sibin & Zhou, Rongji, 2024. "Independent institution or cooperative institution? China’s deposit insurance institution model and the Honey Badger Algorithm," The Quarterly Review of Economics and Finance, Elsevier, vol. 96(C).
    4. Pascal Böni & Heinz Zimmermann, 2024. "The Credit Suisse bailout in hindsight: not a bitter pill to swallow, but a case to follow," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 38(1), pages 1-35, March.

    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. Diemo Dietrich & Achim Hauck, 2020. "Interbank borrowing and lending between financially constrained banks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(2), pages 347-385, September.
    2. Anufriev, Mikhail & Deghi, Andrea & Panchenko, Valentyn & Pin, Paolo, 2026. "A model of network formation for the overnight interbank market: When is core-periphery an illusion?," Journal of Economic Theory, Elsevier, vol. 231(C).
    3. Green, Christopher & Bai, Ye & Murinde, Victor & Ngoka, Kethi & Maana, Isaya & Tiriongo, Samuel, 2016. "Overnight interbank markets and the determination of the interbank rate: A selective survey," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 149-161.
    4. Joseph, Andreas & Vasios, Michalis, 2022. "OTC Microstructure in a period of stress: A Multi-layered network approach," Journal of Banking & Finance, Elsevier, vol. 138(C).
    5. Gara Afonso & Ricardo Lagos, 2015. "The Over‐the‐Counter Theory of the Fed Funds Market: A Primer," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 127-154, June.
    6. Olivier Armantier & Adam Copeland, 2015. "Challenges in identifying interbank loans," Economic Policy Review, Federal Reserve Bank of New York, issue 21-1, pages 1-17.
    7. Gara Afonso & Marco Cipriani & Adam Copeland & Anna Kovner & Gabriele La Spada & Antoine Martin, 2021. "The Market Events of Mid-September 2019," Economic Policy Review, Federal Reserve Bank of New York, vol. 27(2), pages 1-26, August.
    8. Marcin Maciaszczyk, 2018. "Znikający rynek stawek WIBOR. Efekt zmian regulacyjnych dla wyceny stóp rynku międzybankowego w Polsce," Bank i Kredyt, Narodowy Bank Polski, vol. 49(3), pages 217-252.
    9. Anna Kovner & David R. Skeie, 2013. "Evaluating the quality of fed funds lending estimates produced from Fedwire payments data," Staff Reports 629, Federal Reserve Bank of New York.
    10. Garcia-de-Andoain, Carlos & Heider, Florian & Hoerova, Marie & Manganelli, Simone, 2016. "Lending-of-last-resort is as lending-of-last-resort does: Central bank liquidity provision and interbank market functioning in the euro area," Journal of Financial Intermediation, Elsevier, vol. 28(C), pages 32-47.
    11. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
    12. Adam Copeland, 2019. "The Federal Funds Market over the 2007-09 Crisis," Staff Reports 901, Federal Reserve Bank of New York.
    13. Gara Afonso & Kyungmin Kim & Antoine Martin & Ed Nosal & Simon M. Potter & Sam Schulhofer-Wohl, 2023. "Monetary Policy Implementation with Ample Reserves," FRB Atlanta Working Paper 2023-10, Federal Reserve Bank of Atlanta.
    14. Fecht, Falko & Reitz, Stefan, 2015. "Euro money market trading during times of crisis," Kiel Working Papers 2012, Kiel Institute for the World Economy.
    15. Gara Afonso & Ricardo Lagos, 2012. "An empirical study of trade dynamics in the interbank market," Staff Reports 550, Federal Reserve Bank of New York.
    16. Kyungmin Kim, 2017. "A Price-Differentiation Model of the Interbank Market and Its Application to a Financial Crisis," Finance and Economics Discussion Series 2017-065, Board of Governors of the Federal Reserve System (U.S.).
    17. Lucas Marc Fuhrer & Matthias Jüttner & Jan Wrampelmeyer & Matthias Zwicker, 2021. "Reserve tiering and the interbank market," Working Papers 2021-17, Swiss National Bank.
    18. Falko Fecht & Stefan Reitz, 2018. "Dealer behaviour in the Euro money market during times of crisis," Applied Economics, Taylor & Francis Journals, vol. 50(48), pages 5204-5219, October.
    19. Pala, Melissa, 2024. "COVID-19 and the fragmentation of the European interbank market," Discussion Papers 07/2024, Deutsche Bundesbank.
    20. Puriya Abbassi & Falk Bräuning & Niels Schulze, 2021. "Bargaining power and outside options in the interbank lending market," Financial Management, Financial Management Association International, vol. 50(2), pages 553-586, June.

    More about this item

    JEL classification:

    • 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

    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:oup:rcorpf:v:12:y:2023:i:2:p:291-325.. 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: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/rcfs .

    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.