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Do High Deposit Interest Rates Signal Bank Default? Evidence from the Russian Retail Deposit Market

Maria Bondarenko () and Maria Semenova ()
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Maria Bondarenko: National Research University Higher School of Economics

No WP BRP 65/FE/2018, HSE Working papers from National Research University Higher School of Economics

Abstract: In recent years the Russian banking system has witnessed numerous bank license withdrawals. Many of the failed banks had significant volumes of retail deposits in their liabilities, thus, transmitting the default burden to the Deposit Insurance Agency and ultimately to the taxpayers. In their attempt to stay in the market banks may try to attract the depositor funds even more intensively when the failure is not far away. The main assumption of this paper is that banks raise additional funds through inflated deposit interest rates – the overstatement strategy – before leaving the market. We use unique data on Russian bank deposit interest rates for deposits of different maturities in 2015–2016 combined with data about bank fundamentals coming from their financial statements. The results suggest that if a bank offers too generous interest rates for deposits for 180-365 days this can be a signal of a significantly higher probability of license withdrawal in 3 quarters. In their attempt to urgently attract funds when moving closer to default banks assign the highest rates for the longest-term deposits, with the maturity over one year. The interest rates higher than the market average dramatically increase the probability of a bank failure in 2 quarters.

Keywords: Bank failure; Deposit interest rates; Market discipline; Personal deposits; Russia (search for similar items in EconPapers)
JEL-codes: G21 G01 P2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cis and nep-tra
Date: 2018
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Published in WP BRP Series: Financial Economics / FE, June 2018, pages - 28

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Handle: RePEc:hig:wpaper:65/fe/2018