Deposit Insurance,Banking Crises,and Market Discipline: Evidence from a Natural Experiment on Deposit Flows and Rates |
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| Authors: | ALEXEI KARAS WILLIAM PYLE KOEN SCHOORS |
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| Institution: | Alexei Karas is an Assistant Professor in the Social Science Department, Roosevelt Academy (E‐mail: a.karas@roac.nl). William Pyle is an Associate Professor in the Economics Department, Middlebury College (E‐mail: wpyle@middlebury.edu). Koen Schoors is a Professor at CERISE, Ghent University, and BOFIT, Bank of Finland (E‐mail: koen.schoors@ugent.be). |
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| Abstract: | Using evidence from Russia, we carry out what we believe to be the literature's cleanest test of the direct impact of deposit insurance on market discipline and study the combined effect of a banking crisis and deposit insurance on market discipline. We employ a difference‐in‐difference estimator to isolate the change in the behavior of a newly insured group (i.e., households) relative to an uninsured “control” group (i.e., firms). The sensitivity of households to bank capitalization diminishes markedly after the introduction of deposit insurance. The traditional wake‐up call effect of a crisis is muted by this numbing effect of deposit insurance. |
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| Keywords: | E65 G21 G28 P34 deposit insurance market discipline |
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