Market Discipline and Deposit Insurance Reform in Japan

Masami Imai

No 2006-007, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

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.

Keywords: Deposit Insurance; Market Discipline; Japanese Banks (search for similar items in EconPapers)
JEL-codes: G2 G28 O53 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2006-01
New Economics Papers: this item is included in nep-cba, nep-com, nep-fin, nep-fmk, nep-ias and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Published in the Journal of Banking and Finance (Volume 30, Issue 12 , December 2006, Pages 3433-3452)

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http://dx.doi.org/10.1016/j.jbankfin.2006.01.009
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Persistent link: https://EconPapers.repec.org/RePEc:wes:weswpa:2006-007

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