Private deposit insurance, deposit flows, bank lending, and moral hazard

Danisewicz, P., Lee, C. H. and Schaeck, K. (2022) Private deposit insurance, deposit flows, bank lending, and moral hazard. Journal of Financial Intermediation, 52, 100967. (doi: 10.1016/j.jfi.2022.100967)

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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Lee, Dr Jonathan
• Authors: Danisewicz, P., Lee, C. H., and Schaeck, K.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Journal of Financial Intermediation
• Publisher: Elsevier
• ISSN: 1042-9573
• ISSN (Online): 1096-0473
• Published Online: 25 March 2022
• Copyright Holders: Copyright © 2022 Elsevier Inc.
• First Published: First published in Journal of Financial Intermediation 52: 100967
• Publisher Policy: Reproduced in accordance with the publisher copyright policy