Deposit Insurance and Design: Effects on Bank Lending During the Global Financial Crisis

54 Pages Posted: 28 Apr 2020

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Liuling Liu

Bowling Green State University - College of Business Administration

Anthony Saunders

New York University - Leonard N. Stern School of Business

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration

Date Written: March 3, 2020

Abstract

This paper investigates how explicit deposit insurance (EDI) scheme in place influence bank lending during the global financial crisis. Earlier studies reveal tightened overall corporate lending, even lesser amount to foreign borrowers (a “flight home” effect) charging higher interest rates during the 2007-2009 crisis. We report that banks in countries with EDI are associated with smaller reductions (increases) in lending (spreads) and quicker post-crisis recovery. These effects are more pronounced for banks heavily relying on deposit funding. Evidence also reveals that more generous or credible deposit insurance designs are associated with stronger stabilization effects on bank lending during the crisis.

Keywords: Deposit Insurance and Its Design, Bank Lending Activities, Global Financial Crisis

Suggested Citation

Hasan, Iftekhar and Liu, Liuling and Saunders, Anthony and Zhang, Gaiyan, Deposit Insurance and Design: Effects on Bank Lending During the Global Financial Crisis (March 3, 2020). Available at SSRN: https://ssrn.com/abstract=3567763 or http://dx.doi.org/10.2139/ssrn.3567763

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
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Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Liuling Liu

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration ( email )

One University Blvd
St. Louis, MO 63121
United States

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