Deposit Insurance and Depositor Behavior: Evidence from Colombia!

Deposit Insurance coverage is a vital element in maintaining the soundness and resilience of monetary systems. This type of monetary regulation continues to be extensively utilized in history, all over the world, and through the 2008 economic crisis. Despite notable theoretical work in this region, there’s a restricted quantity of empirical studies going through the behavior effects of deposit insurance on depositors. This is because alterations in deposit insurance usually take place in occasions of monetary turmoil, which is hard to obtain high-frequency data from accounts. Our work aims to reply to an easy question: does deposit insurance affect deposit behavior? If that’s the case, because when much?

This problem is especially important because depositors’ responses to deposit insurance may alter the amount of savings in accounts, which affects the supply of credit and for that reason investment. When we consider deposit insurance as developing a safe asset, lower levels of deposit insurance in medium-to-low-earnings countries may explain their lower levels of formal savings.

We read the aftereffect of an unpredicted alternation in deposit insurance in Colombia on depositor behavior, using unique data on monthly deposits from the large Colombian bank, covering greater than 50,000 individuals between 2016 and 2018. We present the outcomes from the survey from the bank’s people to uncover which assets were liquidated as a direct consequence from the policy change. The literature about them has centered on banks’ moral hazard and never on depositors for 2 primary reasons. First, being able to access depositor-level details are difficult, as banking institutions aren’t obliged to reveal such data by regulators. Second, most alterations in deposit insurance occur in times of monetary turbulence, and for that reason, separating the result of deposit insurance from concurrent economic shocks is challenging.

Our work studies the result of deposit insurance on depositors exploiting an unpredicted policy change (highlighted in Figure 1). On April 18, 2017, the Colombian deposit guarantee fund (Fondo de Garantías de Instituciones Financieras) elevated the insurance coverage for individual deposits from 20 million Colombian pesos (COP) (roughly 6,780 USD in the average exchange rate of 2017 close to 2,950 COP/USD) to 50 million COP (around 16,950 USD). The modification was unpredicted and also the announcement towards the public required place just one next day of its implementation. Unlike most alterations in deposit insurance, which happen during financial crises, this increase aimed to update the actual worth of the insurance coverage threshold, which was not altered since 2000.

Our identification strategy combines this rise in time having a way of measuring mix-sectional exposure in the depositor level. We assign visitors to certainly one of four bins based on their average monthly deposits prior to the policy change. Bin 1 includes depositors with average deposits between 5 million and 20 million COP, and who have been therefore fully insured prior to the policy change. Bin 2 includes people with 20 million to 50 million COP and who have been partly insured prior to the change and completely insured following the policy change. Individuals in Bins 3 and 4 have pre-policy deposits above 50 million COP and therefore are therefore never fully insured. Utilizing a difference-in-variations design, we read the differential response of people in every bin towards the policy change.

Figure 1 – Timing from the Policy Change

A diagram showing Pesos around the Y axis and Time around the X axis.

Our results indicate that deposit insurance includes a causal impact on deposits (see Figure 2). We discover that although depositors across different bins were on parallel trends prior to the policy change, individuals who have been fully insured (Bin 1) and nearly fully insured (Bin 2) react to greater insurance by growing their relative level and rate of growth of deposits.

Figure 2 – Event Study Design

A regular chart showing the big event study design

Notes: The y-axis reports the coefficients from the aftereffect of the insurance policy change around the log of deposits, for every bin. The x-axis reports the related lead or lag, where matches May 2017. Vertical lines represent 95% confidence times.

Listed here are our three primary findings. First, a descriptive analysis implies that depositors were bunching underneath the 20 million COP insurance threshold prior to the policy change. Particularly, we realize that a comprehensive mass of people held deposits which is between 15 million and 20 million COP. Second, a celebration-study specs signifies the trends of deposits across Bins 1, 2, 3, and 4 were parallel before April 2017. However, within the 12 several weeks following a policy change, deposits expanded considerably more for those who were completely insured prior to the policy change (Bin 1) as well as for individuals who have been nearly fully insured and grew to become fully insured after April 2017 (Bin 2). In accordance with individuals in Bin 3, the response of people in Bin 1 matches increases of sevenPercent in the amount of deposits and 1.5% within the rate of deposit growth. Individuals in Bin 2 elevated their degree of deposits by 5.3% and deposit growth by .4%. Individuals in Bin 4 don’t show any alternation in the amount or rate of growth of deposits. Our results endure battery power of sturdiness tests and indicate that folks underneath the old policy threshold responded having a greater rise in deposits.

Third, within the paper, we leverage the mix-sectional heterogeneity within the contact with the therapy to estimate an elasticity of deposit growth to deposit insurance of .4 point. This time estimate is near to the elasticity of .6 that people obtain inside a similar exercise exploiting the 2008 threshold rise in the U . s . States, which can be greater because of other occasions that happened throughout the economic crisis. Finally, the outcomes from the survey on 990 clients within our sample indicate that the important fraction of bank clients is aware of deposit insurance and altered their asset holdings (money in particular) to improve deposits. This outcome is an indication of a general change in asset composition as a result of the insurance policy change.

Overall, we feel this paper offers important insights in to the results of deposit insurance for 3 reasons. First, the insurance policy change we consider offers the chance to isolate the result of deposit insurance, unconfounded in the factors which are common in periods of crisis or bankruptcy. Second, the paper quantifies the elasticity of deposit growth to deposit insurance, which may be helpful for theoretical and empirical researchers, policy makers, and bankers. Third, our work plays a role in an increasing literature in the intersection between banking and development financial aspects, showing that financial regulation can promote the dimensions and depth of monetary systems and credit markets.

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