Abstract
Based on the differential protection of household deposits and wealth management products in the limited deposit insurance system, this paper explores effectiveness of bank market discipline and the impact of deposit insurance on market discipline. Using the panel data of Chinese banking industry during 2010–2016, the empirical result shows that, firstly, households are sensitive to bank risks such as capital to asset ratio and non-performing loan ratio (NPL ratio) during the period 2010–2016. Thus, market discipline plays a certain role in the banking industry before introducing deposit insurance. Secondly, deposit insurance increases the risk sensitivity of banks’ wealth management products to capital to assets ratio and NPL ratio, while reducing the risk response of household deposits to these two ratios.
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