Does deposit insurance improve financial intermediation? Evidence from the Russian experiment

Abstract

This study examines how the introduction of deposit insurance affects depositors and banks, using the deposit-insurance scheme introduced into the Russian banking system as a natural experiment. The fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit-taking and decreased reliance upon State-owned banks as custodians of retail deposits. We find that banks entering the new deposit-insurance system increase both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that do not enter the new deposit insurance system. These results hold up in a multivariate panel-data analysis that controls for bank-and time-random effects. The longer a bank has been entered into the deposit insurance system, the greater is its level of deposits and its ratio of deposits to assets. Moreover, this effect is stronger for regional banks and for smaller banks. We also find that implementation of the new deposit-insurance system has the effect of "leveling the playing field" between State-owned banks and privately owned banks. Finally, we find strong evidence of moral hazard following implementation of deposit insurance in the form of increased bank risk-taking. Financial risk and, to a lesser degree, operating risk increase following implementation.JEL Classifications: E53; G21; G28

Determining Factors of Deposit Level of Islamic Bank in Indonesia

“…The implementation of the deposit insurance scheme has successfully increased the public trust to the banking industry. It is shown by the rise in the deposit from the banking sector as can be seen in Figure 1, and this is inline with the research of Chernykh and Cole (2011) regarding implementing effect of deposit insurance scheme in Russia. Source: OJK -Finansial Report (2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015) In last 5 years, the Islamic banking industry has a positive growth ( Figure 2).…”

Bank regulation, risk and return: Evidence from the credit and sovereign debt crises

“…Consistent with this view, Gropp and Vesala (2004) show that the adoption of deposit insurance is related to lower bank risk in the European Union. Similarly, Chernykh and Cole (2011) show that the adoption of deposit insurance in Russia created safer banks. For US credit unions, Karels and McClatchey (1999) find stabilization effects from the adoption of deposit insurance.…”

The Effect of Deposit Insurance on Risk Taking in Asian Banks

“…He noted deposit insurance has been one of the important causes of bank failures during the 1920's (Alston et al, 1994). Chernykh and Cole (2011) analyze bank-level data for 800 institutions in the Russian Federation over the period [2004][2005][2006] and used several types of accounting information. They find that the ratio of equity to total assets ratio declined while the ratio of loans to total assets increased after the implementation of deposit insurance and conclude that deposit insurance created a moral hazard problem in the form of increased risk-taking.…”