Deposit Insurance, Market Discipline and Bank Risk

28 Pages Posted: 5 Jul 2019 Last revised: 17 Jul 2019

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 Schoors

Ghent University

Date Written: June 27, 2019

Abstract

Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on within-bank variation in the ratio of firm deposits to total household and firm deposits, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate for private, domestic banks that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control.

Keywords: risk taking, deposit insurance, market discipline, moral hazard, banks, Russia

JEL Classification: E65, G21, G28, P34

Suggested Citation

Karas, Alexei and Pyle, William and Schoors, Koen, Deposit Insurance, Market Discipline and Bank Risk (June 27, 2019). BOFIT Discussion Paper No. 10/2019, Available at SSRN: https://ssrn.com/abstract=3414165

Alexei Karas (Contact Author)

Utrecht University, University College Roosevelt ( email )

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Utrecht University School of Economics ( email )

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

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William Pyle

Middlebury College - Department of Economics ( email )

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Koen Schoors

Ghent University

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