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

Alexei Karas, William Pyle and Koen Schoors

Middlebury College Working Paper Series from Middlebury College, Department of Economics

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 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.

Pages: 23 pages
Date: 2009-07
New Economics Papers: this item is included in nep-ban, nep-ias and nep-tra
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: The effect of deposit insurance on market discipline: Evidence from a natural experiment on deposit flows (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mdl:mdlpap:0905

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