BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 17/2010:
Bank capital, liquidity creation and deposit insurance
Zuzana Fungacova ()
, Laurent Weill and Mingming Zhou
Abstract: This paper examines how the introduction of deposit
insurance influences the relationship between bank capital and liquidity
creation. As discussed by Berger and Bouwman (2009), there are two
competing hypotheses on this relationship which can be influenced by the
presence of deposit insurance. The introduction of a deposit insurance
scheme in an emerging market, Russia, provides a natural experiment to
investigate this issue. We study three alternative measures of bank
liquidity creation and perform estimations on a large set of Russian banks.
Our findings suggest that the introduction of the deposit insurance scheme
exerts a limited impact on the relationship between bank capital and
liquidity creation and does not change the negative sign of the
relationship. The implication is that better capitalized banks tend to
create less liquidity, which supports the “financial
fragility/crowding-out” hypothesis. This conclusion has important policy
implications for emerging countries as it suggests that bank capital
requirements implemented to support financial stability may harm liquidity
creation.
Keywords: bank capital; liquidity creation; deposit insurance; Russia; (follow links to similar papers)
JEL-Codes: G21; G28; G38; P30; P50; (follow links to similar papers)
35 pages, November 5, 2010
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