Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212685 
Year of Publication: 
2010
Series/Report no.: 
BOFIT Discussion Papers No. 17/2010
Publisher: 
Bank of Finland, Institute for Economies in Transition (BOFIT), Helsinki
Abstract: 
This paper examines how the introduction of deposit insurance influences the relationship between bank cap-ital and liquidity creation. As discussed by Berger and Bouwman (2009), there are two competing hypothes-es on this relationship which can be influenced by the presence of deposit insurance. The introduction of a deposit insurance scheme in an emerging market, Russia, provides a natural experiment to investigate this issue. We study three alternative measures of bank liquidity creation and perform estimations on a large set of Russian banks. Our findings suggest that the introduction of the deposit insurance scheme exerts a limited impact on the relationship between bank capital and liquidity creation and does not change the negative sign of the relationship. The implication is that better capitalized banks tend to create less liquidity, which sup-ports the "financial fragility/crowding-out" hypothesis. This conclusion has important policy implications for emerging countries as it suggests that bank capital requirements implemented to support financial stability may harm liquidity creation.
Subjects: 
Bank capital
liquidity creation
deposit insurance
Russia
JEL: 
G21
G28
G38
P30
P50
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-692-7
Document Type: 
Working Paper

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