Abstract
This paper places the institution of bank deposit protection in the context of government paternalism. I apply the theories of deposit insurance, merit goods, patronized goods, government paternalism, and institutional change to the analysis of the Russian case. I rely on statistical data from Central Bank of Russia, Deposit Insurance Agency, and Rosstat. The findings are five-fold: (1) There is similarity between theoretical justification for government paternalism and intervention in household savings and the humanitarian sphere; (2) Deposit protection fits well the Russian institutional setup, due to its paternalistic nature; (3) The public choice-driven purpose of government intervention in household savings may change in the process. Patronage of small savers becomes camouflage for protection of private banks; (4) Deposit guarantee redistributes wealth from the public sector to the private one; (5) Deposit guarantee hinders the evolution of market discipline and responsibility while fostering opportunistic behavior patterns among depositors and banks. The research implication of the paper is that, in the absence of strict eligibility criteria for merit goods, one can identify goods and services that probably do not belong there but sneak into that category by means of a manipulated public choice and thus get similar treatment with traditional humanitarian sectors. The policy implication is that the authorities might wish to tackle opportunistic behavior at source, i.e. by amending the parameters of the deposit insurance scheme.
Highlights
The purpose of this text article is to place the institution of deposit insurance1 in the context of merit goods theory and paternalistic government policies
The theoretical justification of deposit protection is consistent with the concepts of merit goods (Musgrave, 1987), patronized goods (Rubinstein, 2016) and other theories explaining government paternalism
Contemporary governments lead the establishment of deposit protection schemes and spend public funds to ensure those schemes’ solvency, presumably in order to avoid greater yet social cost resulting from bank failures
Summary
The purpose of this text article is to place the institution of deposit insurance in the context of merit goods theory and paternalistic government policies. The theoretical rationale for deposit protection presumes irrational behavior of individuals, which serves as one of the main assumptions for the traditional theory of merit goods (Musgrave, 1987), as well as contemporary concepts of state paternalism (Kapeliushnikov, 2015; Rubinstein, 2016) Irrationality in this particular case consists in the depositors’ propensity to panic that makes them withdraw deposits from a bank in case of doubt or insecurity, not necessarily for a good reason. The trust of households towards private banks remains low, but under the effect of government guarantee depositors do not mind placing their funds with these institutions (Ibragimova et al, 2015). Deposit insurance premia collected from banks Compensations paid to depositors (b) cumulative, 2004-2018
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