Deposit Insurance Premiums and Bank Risk-Taking

46 Pages Posted: 7 Oct 2020 Last revised: 13 Oct 2020

See all articles by Edward Kim

Edward Kim

UCLA Anderson School of Management

Marcelo Rezende

Board of Governors of the Federal Reserve System

Date Written: August 10, 2020

Abstract

Deposit insurance premiums impose costs on banks' balance sheets, narrowing profit margins and inducing banks to "search for yield." This paper estimates the effects of deposit insurance premiums on bank risk-taking using supervisory data and a kink in the schedule of deposit insurance premiums. We show that deposit insurance premiums weaken bank demand for reserves--a liquid asset with no credit risk--and strengthen the supply of short-term interbank loans--a liquid asset with credit risk. We discuss the implications of these findings for optimal deposit insurance pricing and monetary policy implementation.

Keywords: Banks, Deposit Insurance, Reserves, Federal Funds, Risk-Taking, Regression Kink Design

JEL Classification: G21, G28

Suggested Citation

Kim, Edward and Rezende, Marcelo, Deposit Insurance Premiums and Bank Risk-Taking (August 10, 2020). Available at SSRN: https://ssrn.com/abstract=3676610 or http://dx.doi.org/10.2139/ssrn.3676610

Edward Kim

UCLA Anderson School of Management ( email )

United States

Marcelo Rezende (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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