Deposit Insurance and Bank Liquidity Creation: Evidence from a Natural Experiment in China*

Xiangyi Zhou (), Xinyue Li (), Yifan Zhou () and Alper Kara ()
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Xiangyi Zhou: Xi’an Jiaotong University
Xinyue Li: Xi’an Jiaotong University, Standard Chartered Bank (China) Limited
Yifan Zhou: University of Leicester
Alper Kara: Brunel University London

Journal of Financial Services Research, 2025, vol. 67, issue 3, No 2, 137 pages

Abstract: Abstract In this paper, we examine how the implementation of deposit insurance influences the impact of bank capital, excess lending, banking competition and monetary policy on liquidity creation of banks. Our examination uses China’s introduction of deposit insurance in 2015 as a natural experiment. We find that deposit insurance positively reinforces the effect of capital but weakens that of monetary policy on liquidity creation. We do not find that deposit insurance has a significant influence on the effects of excess lending and competition on the liquidity creation of banks. We also show that the implementation of deposit insurance has heterogenous effects on the liquidity creation of large and small banks.

Keywords: Deposit Insurance; Liquidity Creation; China; Banks; G21; G28; G38 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10693-024-00431-z

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