The Importance of Deposit Insurance Credibility

37 Pages Posted: 28 Sep 2020 Last revised: 19 Sep 2023

See all articles by Diana Bonfim

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

João A. C. Santos

Federal Reserve Bank of New York; Nova School of Business and Economics

Date Written: July 7, 2020

Abstract

Sovereigns usually back up their deposit insurance arrangements to lend them credibility. When the sovereign is in distress, the credibility of deposit insurance might be threatened, with detrimental effects to financial stability. We investigate the behavior of depositors during the euro area sovereign debt crisis to understand the importance of deposit insurance credibility. We find that depositors responded to foreign banks’ decision to convert their subsidiaries into branches. By relocating their deposits into these newly formed branches during a period of sovereign distress, depositors became insured by a deposit insurance scheme with a stronger fiscal backstop. These results document a novel channel through which sovereign-bank links can be reinforced during a crisis: the credibility of deposit insurance.

Keywords: bank deposits, deposit insurance, bank runs, market discipline

JEL Classification: G01, G21, G28

Suggested Citation

Bonfim, Diana and Santos, João A. C., The Importance of Deposit Insurance Credibility (July 7, 2020). Journal of Banking and Finance, No. 154, 2023, Available at SSRN: https://ssrn.com/abstract=3674147 or http://dx.doi.org/10.2139/ssrn.3674147

Diana Bonfim (Contact Author)

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: http://HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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