The Role of Deposit Insurance in Liquidity Risk Management: Evidence from Systematic Banking Crises

48 Pages Posted: 22 Feb 2016

See all articles by Phong T. H. Ngo

Phong T. H. Ngo

Australian National University (ANU)

Diego Puente M.

University of Technology Sydney (UTS; Australian National University (ANU)

Zain Virani

Australian National University (ANU)

Date Written: 2016

Abstract

Customer deposits have traditionally been viewed as the primary source of liquidity risk facing banks. However, research over the past decade suggests that customer deposits can hedge the liquidity risk, stemming from unused loan commitments, since the liquidity demands of depositors and borrowers are not perfectly correlated. We argue in this paper that this complementarity between the simultaneous provision of liquidity to depositors and borrowers is only possible in the presence of deposit insurance. Accordingly, we use IMF-defined episodes of banking crises over the last 25 years as shocks to market liquidity to identify the impact of deposit insurance on bank lending during crises. The results suggest that there is significant positive relation between continued loan growth during crises and whether banks have access to deposit insurance. Further, this effect is concentrated in banks, relying more on core deposit funding.

Keywords: liquidity risk, deposit insurance, banking crises

JEL Classification: G01, G20, G21, G28, E44

Suggested Citation

Ngo, Phong T. H. and Puente Moncayo, Diego and Virani, Zain, The Role of Deposit Insurance in Liquidity Risk Management: Evidence from Systematic Banking Crises (2016). Melbourne Business School, 2016 Financial Institutions, Regulation & Corporate Governance (FIRCG) Conference, Available at SSRN: https://ssrn.com/abstract=2736059 or http://dx.doi.org/10.2139/ssrn.2736059

Phong T. H. Ngo

Australian National University (ANU) ( email )

RSFAS, College of Business and Economics
Australian National University
Canberra, Australian Capital Territory 0200
Australia
+61 2 6125 1079 (Phone)

HOME PAGE: http://cbe.anu.edu.au/people/rsfas/phong-ngo/

Diego Puente Moncayo (Contact Author)

University of Technology Sydney (UTS ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Zain Virani

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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