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Market Discipline and Deposit Insurance Reform in Japan

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  • Masami Imai

    () (Economics and East Asian Studies, Wesleyan University)

Abstract

On April 1, 2002, the Japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits. This paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline. I find that the reform raised the sensitivity of interest rates on deposits, and that of deposit quantity to default risk. In addition, the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks. These results suggest that the deposit insurance reform enhanced market discipline in Japan. I also find that too-big-to-fail (TBTF) policy became a more important determinant of interest rates and deposit allocation after the reform, thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline.

Suggested Citation

  • Masami Imai, 2006. "Market Discipline and Deposit Insurance Reform in Japan," Wesleyan Economics Working Papers 2006-007, Wesleyan University, Department of Economics.
  • Handle: RePEc:wes:weswpa:2006-007
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    File URL: http://dx.doi.org/10.1016/j.jbankfin.2006.01.009
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    Keywords

    Deposit Insurance; Market Discipline; Japanese Banks;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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