Deposit insurance, market discipline and bank risk

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Title: Deposit insurance, market discipline and bank risk
Author: Karas, Alexei ; Pyle, William ; Schoors, Koen
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 10/2019
Year of publication: 2019
Publication date: 27.6.2019
Pages: 28
Subject (yso): pankit; talletussuoja; riskit
Keywords: Bofit-kokoelma; Venäjä; riskinotto; moraalikato; pankkitoiminta
JEL: E65; G21; G28; P34
Other keywords: risk taking; deposit insurance; market discipline; moral hazard; banks; Russia
Abstract: Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on within-bank variation in the ratio of firm deposits to total household and firm deposits, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate for private, domestic banks that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control.

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