Private deposit insurance,deposit flows,bank lending,and moral hazard |
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| Affiliation: | 1. University of Bristol and University of Zurich;2. University of Glasgow;3. University of Bristol;1. Audencia Business School, 8 rue de la Jonelière, 44312 Nantes, France;2. TBS Business School, 1 place Alfonse Jourdain, 31068 Toulouse, France;3. Ghent University, Department of Financial Economics, Sint-Pietersplein 5, 9000 Ghent, Belgium;1. Department of Economics University of Birmingham, United Kingdom;2. Department of Economics Carleton University, United Kingdom;1. Universitat Jaume I, Spain;2. Brazilian School of Public and Business Administration, Getulio Vargas Foundation, Brazil;3. EPGE Brazilian School of Economics and Finance, Getulio Vargas Foundation, Brazil;4. Harvard Business School, USA;5. Kelley School of Business, Indiana University, USA |
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| Abstract: | We examine the role of private unlimited deposit insurance as a complement to federal deposit insurance for deposit flows, bank lending, and moral hazard during a crisis. We find that banks whose deposits are federally and privately fully insured obtain more deposits and expand lending, in contrast to banks whose deposits are only federally insured. We also document that privately insured banks remain prudent in the loan origination process during the subprime crisis. Our results offer novel insights into depositor and bank behavior in the presence of multiple deposit insurance schemes with differential design features. They also illustrate how private sector solutions incentivize prudent bank behavior to strengthen the financial safety net. |
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