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The Effect of Deposit Insurance on Market Discipline:Evidence from a Natural Experiment on Deposit Flows

  • Alexei Karas
  • William Pyle

    ()

  • Koen Schoors

We explore how the introduction of explicit deposit insurance affects deposit flows into and out of banks of varying risk levels. Using evidence from a natural experiment in Russia, we employ a difference-in-difference estimator to isolate the change in the deposit flows of the newly insured group (i.e., households) relative to the uninsured “control” group (i.e., firms), thus improving upon prior studies that have sought to identify the effect of deposit insurance on market discipline. We find that the relative sensitivity of household deposits to bank capitalization diminished markedly after the introduction of an insurance program covering their deposits but not those of firms. The finding, we demonstrate, is not an artifact of the two groups responding differently to a banking crisis that occurred in Russia at roughly the same time.

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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0905.pdf
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Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0905.

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Length: 23 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:mdl:mdlpap:0905
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  1. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
  2. Alexei Karas & William Pyle & Koen Schoors, 2009. "The Effect of Deposit Insurance on Market Discipline:Evidence from a Natural Experiment on Deposit Flows," Middlebury College Working Paper Series 0905, Middlebury College, Department of Economics.
  3. Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-11, May.
  4. repec:dgr:kubcen:200385 is not listed on IDEAS
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