Deposit Insurance Premiums and Bank Risk

48 Pages Posted: 7 Oct 2020 Last revised: 6 Sep 2022

See all articles by Edward T. Kim

Edward T. Kim

University of Michigan, Stephen M. Ross School of Business

Marcelo Rezende

Board of Governors of the Federal Reserve System

Date Written: August 30, 2022

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 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

Kim, Edward T. and Rezende, Marcelo, Deposit Insurance Premiums and Bank Risk (August 30, 2022). Available at SSRN: https://ssrn.com/abstract=3676610 or http://dx.doi.org/10.2139/ssrn.3676610

Edward T. Kim

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Ave
Ann Arbor, MI 48109
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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