Private deposit insurance, deposit flows, bank lending, and moral hazard

59 Pages Posted: 15 Aug 2019 Last revised: 30 Mar 2022

See all articles by Piotr Danisewicz

Piotr Danisewicz

Tilburg University - Department of Finance; University of Zurich

chun hei lee

University of Glasgow

Klaus Schaeck

University of Bristol

Abstract

We examine the role of private unlimited deposit insurance as a complement to federal deposit insurance for deposit flows, bank lending, and moral hazard during a crisis. We find that banks whose deposits are federally and privately fully insured obtain more deposits and expand lending, in contrast to banks whose deposits are only federally insured. We also document that privately insured banks remain prudent in the loan origination process during the subprime crisis. Our results offer novel insights into depositor and bank behavior in the presence of multiple deposit insurance schemes with differential design features. They also illustrate how private sector solutions incentivize prudent bank behavior to strengthen the financial safety net.

Keywords: private deposit insurance, deposit flows, lending, financial crisis

JEL Classification: G21, G28

Suggested Citation

Danisewicz, Piotr and lee, chun hei and Schaeck, Klaus, Private deposit insurance, deposit flows, bank lending, and moral hazard. Journal of Financial Intermediation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3436040 or http://dx.doi.org/10.2139/ssrn.3436040

Piotr Danisewicz

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

University of Zurich ( email )

Institute for Banking & Finance
Zurich, 8001
Switzerland

Chun hei Lee

University of Glasgow ( email )

United Kingdom

Klaus Schaeck (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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