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Deposit Insurance and External Finance

Stephen Cecchetti () and Stefan Krause Montalbert

No 10908, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Countries around the world differ substantially in the relative importance of their banks and capital markets in providing investment financing. This paper examines one potential explanation for the cross-country differences in the importance of banks and capital market financing of investment. It is our contention that much of the variation across countries in the depth and breadth of capital markets can be explained by a combination of the existence of deposit insurance and the extent to which a country's banking system is state owned. We provide both an equilibrium model predicting and empirical evidence showing that countries with explicit deposit insurance and a high degree of state-owned bank assets have smaller equity markets, a lower number of publicly traded firms and a smaller amount of bank credit to the private sector. Finally, our results suggest that the effects of deposit guarantees are more important than the origins of national legal systems.

JEL-codes: G21 G22 G32 (search for similar items in EconPapers)
Date: 2004-11
Note: CH CF ME
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Published as Cecchetti, Stephen G. and Stefan Krause. "Deposit Insurance And External Finance," Economic Inquiry, 2005, v43(3,Jul), 531-541.

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