Deposit Insurance, Institutions and Bank Interest Rates

Carapella, Francesca and Di Giorgio, Giorgio (2003) Deposit Insurance, Institutions and Bank Interest Rates. [Working Paper]. p. 22. Discussion Paper (No. 0304-06).

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Many recent institutional reforms of the financial system have relied on the introduction of an explicit scheme of Deposit Insurance. This instrument aims at two main targets, contributing to systemic stability and protecting depositors. However it may also affect the interest rate spread in the banking system, which can be viewed as an indicator of market power in this financial segment. This paper provides an empirical investigation of the effect of deposit insurance and other institutional and economic variables on bank interest rates across countries. We find that deposit insurance increases the lending borrowing spread in banking. The main effect seems to arise not from the deposit side though, but from an increase in the lending rate. We interpret this result as evidence of the presence of moral hazard problems related to this instrument. We also find that higher quality of institutions is associated with lower spreads, thus contributing to eroding sources of market power in the banking sector.

Item Type: Report / Paper (Working Paper)
Research documents and activity classification: Working Papers > Non-Refereed Working Papers / of national relevance only
Divisions: Department of Business and Management
Additional Information: This paper has been accepted and published in "Transition Studies Review", Springer, vol. 11(3), pages 77-92, December 2004
Uncontrolled Keywords: Deposit Insurance, Institutions, Interest Rates
MIUR Scientific Area: Area 13 - Economics and Statistics > SECS-P/01 Political Economy
Deposited by: Maria Teresa Nisticò
Date Deposited: 23 Nov 2010 07:25
Last Modified: 22 Apr 2015 00:13


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