Bank Capital, Liquidity Creation and Deposit Insurance

35 Pages Posted: 7 Nov 2010

See all articles by Zuzana Fungáčová

Zuzana Fungáčová

Bank of Finland - Institute for Economies in Transition (BOFIT)

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)

Mingming Zhou

University of Colorado, Colorado Springs - College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 29, 2010

Abstract

This paper examines how the introduction of deposit insurance influences the relationship between bank capital and liquidity creation. As discussed by Berger and Bouwman (2009), there are two competing hypotheses 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 supports 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.

Keywords: bank capital, liquidity creation, deposit insurance, Russia

JEL Classification: G21, G28, G38, P30, P50

Suggested Citation

Fungacova, Zuzana and Weill, Laurent and Zhou, Mingming, Bank Capital, Liquidity Creation and Deposit Insurance (September 29, 2010). BOFIT Discussion Paper No. 17/2010, Available at SSRN: https://ssrn.com/abstract=1703370 or http://dx.doi.org/10.2139/ssrn.1703370

Zuzana Fungacova (Contact Author)

Bank of Finland - Institute for Economies in Transition (BOFIT) ( email )

Snellmaninaukio
PO Box 160
Helsinki 00101
Finland

HOME PAGE: http://www.bof.fi/bofit_en/index.htm

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie) ( email )

61 Avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

Mingming Zhou

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States
1-719-255-5153 (Phone)

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