Political Connections, Bank Deposits, and Formal Deposit Insurance

45 Pages Posted: 31 May 2012 Last revised: 21 Mar 2014

See all articles by Emmanuelle Nys

Emmanuelle Nys

Université de Limoges, LAPE

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Irwan Trinugroho

Université de Limoges, LAPE

Multiple version iconThere are 2 versions of this paper

Date Written: March 21, 2014

Abstract

This paper investigates the impact of banks' political connections on their ability to collect deposits under two different deposit insurance regimes (blanket guarantee and limited guarantee). We estimate a simultaneous equations model of supply and demand for funds using quarterly data for Indonesian banks from 2002 to 2008. We find that, regardless of their type (state-owned or private entities), politically connected banks are able to attract deposits more easily than their non-connected counterparts. We also show that this effect is more pronounced after the implementation of formal deposit insurance with limited coverage. Our findings have various policy implications. Formal deposit insurance might have improved market discipline, as highlighted by earlier studies, but it has also exacerbated the issue of political connections in the banking sector.

Keywords: Banking; Political connections; Bank Deposits; Funds; Deposit insurance system; Indonesia

JEL Classification: G28, D72

Suggested Citation

Nys, Emmanuelle and Tarazi, Amine and Trinugroho, Irwan, Political Connections, Bank Deposits, and Formal Deposit Insurance (March 21, 2014). Available at SSRN: https://ssrn.com/abstract=2070547 or http://dx.doi.org/10.2139/ssrn.2070547

Emmanuelle Nys (Contact Author)

Université de Limoges, LAPE ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Irwan Trinugroho

Université de Limoges, LAPE ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

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