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Bank capital, liquidity creation and deposit insurance

Zuzana Fungáčová (), Laurent Weill () and Mingming Zhou

No 17/2010, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

Abstract: This paper examines how the introduction of deposit insurance influences the relationship between bank cap-ital and liquidity creation. As discussed by Berger and Bouwman (2009), there are two competing hypothes-es 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 sup-ports 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. JEL classification: G21; G28; G38; P30; P50 Keywords: Bank capital, liquidity creation, deposit insurance, Russia

JEL-codes: G21 G28 G38 P30 P50 (search for similar items in EconPapers)
Date: 2010-11-05
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Published in Published in Journal of Financial Services Research, 51(1), 2017: 97-123

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