Bank Capital, Liquidity Creation and Deposit Insurance

26 Pages Posted: 19 Sep 2012

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: June 7, 2012

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 empirically investigate this issue. We use the difference-in-difference approach on a large dataset of all Russian banks. Our findings suggest that the introduction of the deposit insurance scheme does not have an impact on the relationship between capital and liquidity creation for all banks. However, it influences this relationship in the banks that are most affected by this scheme. For these banks, deposit insurance reduces the impact of capital on liquidity creation. This finding has important policy implications as it suggests that deposit insurance and capital requirements should not be considered separately by bank regulators.

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 (June 7, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2079656 or http://dx.doi.org/10.2139/ssrn.2079656

Zuzana Fungacova

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 (Contact Author)

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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