BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 8/2010:
The effect of deposit insurance on market discipline: Evidence from a natural experiment on deposit flows
Alexei Karas ()
, William Pyle and Koen Schoors
Abstract: 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 a newly insured group (households) relative to an uninsured
“control” group (firms). This approach improves on earlier studies seeking
to identify the effect of deposit insurance on market discipline. We find
that the relative sensitivity of households to bank capitalization
diminished markedly with the introduction of an insurance program covering
their deposits. This was not true for firms, however. We then show the
finding is not an artifact of the two groups responding differently to a
minor banking crisis that arose at roughly the same time.
Keywords: deposit insurance; market discipline; (follow links to similar papers)
JEL-Codes: E65; G21; G28; P34; (follow links to similar papers)
32 pages, June 19, 2010
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