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Market Discipline and Deposit Insurance Reform in Japan

  • Masami Imai

    ()

    (Economics and East Asian Studies, Wesleyan University)

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.

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File URL: http://dx.doi.org/10.1016/j.jbankfin.2006.01.009
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Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2006-007.

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Length: 32 pages
Date of creation: Jan 2006
Date of revision:
Publication status: Published in the Journal of Banking and Finance (Volume 30, Issue 12 , December 2006, Pages 3433-3452)
Handle: RePEc:wes:weswpa:2006-007
Contact details of provider: Postal: PAC 123, 238 Church Street, Middletown, CT 06459-0007
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Web page: http://www.wesleyan.edu/econ/

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