Bank capital, liquidity creation and deposit insurance

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Title: Bank capital, liquidity creation and deposit insurance
Author: Fungáčová, Zuzana ; Weill, Laurent ; Zhou, Mingming
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 17/2010
Year of publication: 2010
Publication date: 5.11.2010
Published in: Published in Journal of Financial Services Research, 51(1), 2017: 97-123
Pages: 37 s.
Keywords: talletussuoja; likviditeetti; pankkitoiminta; pääoma; Venäjä; Bofit-kokoelma
JEL: G21; G28; G38; P30; P50
Abstract: This paper examines how the introduction of deposit insurance influences the relationship between bank cap-ital and liquidity creation. As discussed by Berger and Bouwman (2009), there are two competing hypothes-es on this relationship which can be influenced by the presence of deposit insurance. The introduction of a deposit insurance scheme in an emerging market, Russia, provides a natural experiment to investigate this issue. We study three alternative measures of bank liquidity creation and perform estimations on a large set of Russian banks. Our findings suggest that the introduction of the deposit insurance scheme exerts a limited impact on the relationship between bank capital and liquidity creation and does not change the negative sign of the relationship. The implication is that better capitalized banks tend to create less liquidity, which sup-ports the "financial fragility/crowding-out" hypothesis. This conclusion has important policy implications for emerging countries as it suggests that bank capital requirements implemented to support financial stability may harm liquidity creation. JEL classification: G21; G28; G38; P30; P50 Keywords: Bank capital, liquidity creation, deposit insurance, Russia

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