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The effect of deposit insurance on market discipline: Evidence from a natural experiment on deposit flows

Alexei Karas, William Pyle and Koen Schoors
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William Pyle: BOFIT, Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland

No 8/2010, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

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 (search for similar items in EconPapers)
JEL-codes: E65 G21 G28 P34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cis, nep-ias and nep-tra
Date: 2010-06-19
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Working Paper: The Effect of Deposit Insurance on Market Discipline:Evidence from a Natural Experiment on Deposit Flows (2009) Downloads
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