The Effect of Deposit Insurance on Market Discipline: Evidence from a Natural Experiment on Deposit Flows

32 Pages Posted: 2 Aug 2010

See all articles by Alexei Karas

Alexei Karas

Utrecht University, University College Roosevelt; Utrecht University School of Economics; Centre for Russian International Socio-Political and Economic Studies (CERISE)

William Pyle

Middlebury College - Department of Economics

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE); Ghent University - Department of General Economics

Date Written: July 19, 2010

Abstract

We explore how the introduction of explicit deposit insurance affects deposit flows into and out of banks of varying risk levels. Using evidence from a natural experiment in Russia, we employ a difference-in-difference estimator to isolate the change in the deposit flows of a newly insured group (households) relative to an uninsured “control” group (firms). This approach improves on earlier studies seeking to identify the effect of deposit insurance on market discipline. We find that the relative sensitivity of households to bank capitalization diminished markedly with the introduction of an insurance program covering their deposits. This was not true for firms, however. We then show the finding is not an artifact of the two groups responding differently to a minor banking crisis that arose at roughly the same time.

Keywords: deposit insurance, market discipline

JEL Classification: E65, G21, G28, P34

Suggested Citation

Karas, Alexei and Pyle, William and Schoors, Koen J. L., The Effect of Deposit Insurance on Market Discipline: Evidence from a Natural Experiment on Deposit Flows (July 19, 2010). BOFIT Discussion Paper No. 8/2010, Available at SSRN: https://ssrn.com/abstract=1651126 or http://dx.doi.org/10.2139/ssrn.1651126

Alexei Karas (Contact Author)

Utrecht University, University College Roosevelt ( email )

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Utrecht University School of Economics ( email )

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William Pyle

Middlebury College - Department of Economics ( email )

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Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE) ( email )

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Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 265 35 99 (Fax)

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 264 35 99 (Fax)

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