THE TRAVELS OF A BANK DEPOSIT IN TURBULENT TIMES: THE IMPORTANCE OF DEPOSIT INSURANCE DESIGN FOR CROSS‐BORDER DEPOSITS

Shusen Qi,Stefanie Kleimeier,Harald Sander

doi:10.1111/ecin.12845

Abstract

We examine the impact of the existence on an explicit deposit insurance (DI) scheme and its design features on bilateral cross‐border deposits (CBD) in a gravity model setting. We find that both the absolute quality of a country's DI and its relative quality vis‐à‐vis other countries' DI generally affect depositor behavior. However, during systemic banking crises, cross‐border depositors primarily seek countries with the best DI schemes. Similarly, during the 2008–2009 great financial crisis, the emergency actions taken by the governments, which supply and maintain these safe havens, have led to substantial relocations of CBD. (JEL F34, G18)

Highlights

We examine the impact of the existence on an explicit deposit insurance (DI) scheme and its design features on bilateral cross-border deposits (CBD) in a gravity model setting
We find that the quest for safe havens and the engagement in regulatory arbitrage are both important drivers of cross-border depositing in stable times
Looking first at the coefficients for all “safe haven” regressors, we find that all but one of safe haven motives remain significant even when taking into account regulatory arbitrage behavior: Depositors are looking for the best DI schemes in bank countries

Summary

Introduction

We examine the impact of the existence on an explicit deposit insurance (DI) scheme and its design features on bilateral cross-border deposits (CBD) in a gravity model setting. We find that both the absolute quality of a country’s DI and its relative quality vis-à-vis other countries’ DI generally affect depositor behavior. During systemic banking crises, cross-border depositors primarily seek countries with the best DI schemes. By 2006, just before the great financial crisis (GFC) of 2008–2009, 79 of the countries surveyed by the World Bank had an explicit DI scheme. BIS: Bank for International Settlements CBD: Cross-Border Deposits DI: Deposit Insurance DID: Difference-In-Differences FTA: Free Trade Agreement

Methods

Results

Conclusion