Deposit Insurance Premiums and Bank Risk
48 Pages Posted: 7 Oct 2020 Last revised: 6 Sep 2022
Date Written: August 30, 2022
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 portfolio rebalancing using supervisory data and a kink in the insurance premium schedule. We show that deposit insurance premiums weaken banks’ demand for reserves (a liquid asset with no credit risk) and strengthen the supply of short-term interbank loans (a less liquid asset with credit risk). We discuss the implications of these findings for optimal deposit insurance pricing.
Keywords: Deposit Insurance, Reserves, Federal Funds, Regression Kink Design
JEL Classification: G21, G28
Suggested Citation: Suggested Citation