Deposit Insurance, Banking Crises, and Market Discipline: Evidence from a Natural Experiment on Deposit Flows and Rates

Karas, Alexei; Pyle, William; Schoors, Koen

doi:10.1111/j.1538-4616.2012.00566.x

Cited by 168 publications

(87 citation statements)

References 29 publications

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“…17 16 Full results are available upon request. and Karas et al (2013) employed a similar projection of their results in their analyses of market discipline in the Turkish and Russian banking sector, respectively. 17 Fueda and Konishi (2007) show that depositor sensitivity in Japan was most significant in the period 1997-2001 despite the presence of a blanket guarantee.…”

Section: Before and After The 2001q1 Crisismentioning

confidence: 99%

“…Further, more than any other measure, the capital ratio is extensively used as a proxy for bank risk taking in market discipline studies, in both developed and emerging market economies (e.g., Hannan and Hanweck 1988, Park and Peristiani 1998, Martinez Peria and Schmukler 2001, Karas et al 2013, Berger and Turk-Ariss 2014. We also refer to and who found that only bank capital proved to be unambiguously leading to depositor discipline in the Turkish conventional banking market.…”

Section: Subsequently In December 2005 Anadolu Finans and Family Fimentioning

confidence: 99%

“…Our identification strategy is the most related to Karas et al (2013). They employ a similar difference-in-differences methodology to identify the differential impact of deposit insurance on the behavior of insured households and uninsured firms and find evidence that insurance diminishes the insured depositors' sensitivity to bank risk.…”

Section: Subsequently In December 2005 Anadolu Finans and Family Fimentioning

confidence: 99%

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Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

et al. 2016

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Although it has been intensively claimed that Islamic banks are more subject to market discipline, the empirical literature is surprisingly mute on this topic. To fill this gap and to verify the conjecture that Islamic bank depositors are indeed able to monitor and discipline their banks, we use Turkey as a test setting. The theory of market discipline predicts that when excessive risk taking occurs, depositors will ask higher returns on their deposits or withdraw their funds. We look at the effect of the deposit insurance reform in which the dual deposit insurance was revised and all banks were put under the same deposit insurance company in December 2005. This gives us a natural experiment in which the effect of the reform can be compared for the treatment group (i.e., Islamic banks) and control group (i.e., conventional banks). We find that the deposit insurance reform has increased market discipline in the Turkish Islamic banking sector. This reform may have upset the sensitivities of the religiously inspired depositors, and perhaps more importantly it might have terminated the existing mutual supervision and support among Islamic banks.JEL codes: G23, G28, O52

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Section: Before and After The 2001q1 Crisismentioning

confidence: 99%

Section: Subsequently In December 2005 Anadolu Finans and Family Fimentioning

confidence: 99%

Section: Subsequently In December 2005 Anadolu Finans and Family Fimentioning

confidence: 99%

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Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

et al. 2016

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“…This does not imply that the findings of our experiment are only relevant to understanding the behavior of uninsured retail depositors or wholesale depositors. 10 Several recent studies emphasize that retail depositors have very limited knowledge about deposit insurance (Bartirolo, 2011;Sträter et al, 2008) and that even informed and insured depositors are likely to withdraw deposits from distressed banks (Iyer and Puri, 2012;Karas et al, 2013;Pyle et al, 2012). Moreover, the design provides an experimental counterfactual for discussions of a reduction of current levels of deposit insurance in the context of bank incentives.…”

Section: Ecb Working Paper 1711 August 2014mentioning

confidence: 99%

Understanding Bank-Run Contagion

2017

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The refereeing process of this paper has been coordinated by a team composed of Gerhard Rünstler, Kalin Nikolov and Bernd Schwaab (all ECB). Terms of use: Documents inThe paper is released in order to make the research of MaRs generally available, in preliminary form, to encourage comments and suggestions prior to fi nal publication. The views expressed in the paper are the ones of the author(s) and do not necessarily refl ect those of the ECB or of the ESCB. Acknowledgements Abstract:We study experimental coordination games to examine through which transmission channels, and under which information conditions, a panic-based depositor-run at one bank may trigger a panic-based depositor-run at another bank. We find that withdrawals at one bank trigger withdrawals at another bank by increasing players' beliefs that other depositors in their own bank will withdraw, making them more likely to withdraw as well. Importantly though, observed withdrawals affect depositors' beliefs, and are thus contagious, only when depositors know that there are economic linkages between their bank and the observed bank.JEL classification: D81; G21; G28

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“…Our results confirm this conjecture, while at the same time clarifying which deposit insurance characteristics are most important for depositor confidence. In the paper that is perhaps most similar in spirit to ours, Karas et al (2013) compare the reactions of newly-insured and uninsured depositors to a 2004 minor panic in the Russian banking sector; in a related manner, our study attempts to compare the reactions of newlyinsured and historically-insured depositors to a hypothetical crisis that allows for a wider range of deposit insurance features and depositor attributes, and for consideration of counter-factual events. Overall, our quasi-experimental approach provides a fresh perspective on a well-travelled area by allowing us to ask new questions and re-investigate old answers.…”

Section: Introductionmentioning

confidence: 99%

The impact of deposit insurance on depositor behavior during a crisis: A conjoint analysis approach

Boyle

Stover

Tiwana

et al. 2015

Journal of Financial Intermediation

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We investigate the effectiveness of initiating deposit insurance at the outset of a banking crisis. Using a conjoint analysis approach that allows us to consider the simultaneous impact of multiple deposit insurance attributes and various counterfactuals, we ask a multinational sample of respondents how they would view hypothetical account profiles following the failure of a large competing bank. Previous experience matters: respondents from countries without explicit deposit insurance exhibit greater withdrawal risk, suggesting that the introduction of deposit insurance during a crisis may be only partially successful in preventing bank runs. They also impose a higher deposit interest rate premium. Having a long-term bank relationship reduces withdrawal risk, as does the absence of co-insurance. Keywordsdeposit insurance, banking crises, bank run, conjoint analysis Disciplines Behavioral Economics | FinanceComments NOTICE: this is the author's version of a work that was accepted for publication in Journal of Financial Intermediation. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Intermediation, [24, 4, (2015) NOTICE: this is the author's version of a work that was accepted for publication in Journal of Financial Intermediation. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Intermediation, [24, 4, (2015)] doi:10.1016/j.jfi.2015.02.001 THE IMPACT OF DEPOSIT INSURANCE ON DEPOSITOR BEHAVIOR DURING A CRISIS: A CONJOINT ANALYSIS APPROACH AbstractWe investigate the effectiveness of initiating deposit insurance at the outset of a banking crisis.Using a conjoint analysis approach that allows us to consider the simultaneous impact of multiple deposit insurance attributes and various counterfactuals, we ask a multinational sample of respondents how they would view hypothetical account profiles following the failure of a large competing bank. Previous experience matters: respondents from countries without explicit deposit insurance exhibit greater withdrawal risk, suggesting that the introduction of deposit insurance during a crisis may be only partially successful in preventing bank runs. They also impose a higher deposit interest rate premium. Having a long-term bank relationship reduces withdrawal risk, as does the absence of co-insurance.

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Deposit Insurance, Banking Crises, and Market Discipline: Evidence from a Natural Experiment on Deposit Flows and Rates

Cited by 168 publications

References 29 publications

Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

Understanding Bank-Run Contagion

The impact of deposit insurance on depositor behavior during a crisis: A conjoint analysis approach

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