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Deposit Insurance,Institutions, and Bank Interest Rates
Authors:Francesca Carapella  Giorgio Di Giorgio
Affiliation:(1) Libera Università Internazionale degli Studi Sociali Guido Carli, Rome, Italy;(2) Graduate School, University of Minnesota, Twin Cities, Minnesota, USA
Abstract: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 either inefficiency or 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–deposit 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.
Keywords:deposit insurance  institutions  interest rates
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