Deposit Insurance and Banks Deposit Rates: Evidence From a EU Policy
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1 Deposit Insurance and Banks Deposit Rates: Evidence From a EU Policy Matteo Gatti Tommaso Oliviero EUI University of Naples and CEF May 1, 2017
2 Motivation In 2009 EU raised deposit insurance limit to e100, 000 Deposits account for around 40% of total EU banks funds Previous limit was e20,000 but it varied across EU Goal: Reduce riskiness of bank-runs in Financial Crisis In the aftermath of the crisis policymakers need to understand its implications on the banking system Do banks pass through deposit insurance costs to depositors? Do depositors monitor banks less? Important step towards an integrated Banking Union
3 Deposit Insurance Benefits (and Costs) Deposit Insurance protects depositors, from bank s inability to pay its debts when due Theory on Deposit Insurance Kills the run equilibrium (no cost) Diamond Dybvig (1983) Lowers run prob (pecuniary externality) Davila et. al (2017) Induces moral hazard (risk shifting) Cooper Ross (2002) (Little) Empirical Evidence Greater risk taking Lambert et. al (2017) Greater likelihood of financial crisis Demigurt-Kunt et. al (2002)
4 This Paper Exploits the exogenous variation introduced by the 2009 increase in deposit insurance limit on EU banks Studies empirically the costs associated to higher deposit insurance limits Pass through of DI costs Lower depositors monitoring Focuses on deposit rates paid by banks to depositors Runs a diff-in-diff to estimate the causal effect of deposit insurance on deposit rates
5 Preview of Findings Cross-Country analysis: when DI limits increase, banks Decrease deposit rates Do not increase total deposits What s new? Banks pass through higher costs to depositors and depositors perceive deposits as safer assets Bank-level analysis: when DI limits increase Banks decrease deposit rates Riskier banks decrease deposit rates more What s new? Riskier banks pay lower rates as depositors no longer monitor them
6 SETTING AND DATA
7 March 2009: EU Increases Deposit Insurance Limit (DIL) 2009/14/EC Directive increases DIL to e100, 000 Previous limit was set to e20, 000 by 94/19/EC Directive Some EU countries increased the e20, 000 limit Deposit Insurance Funds were not adequate With the Financial Crisis in Fall 2008 Rat race across EU countries to increase the limit Some government impose blanket guarantees In Oct 2008 Ecofin increased DIL to e50, 000 Italy already had a e103, 291 limit from 1994
8 Deposit Insurance Limits Deposit Insurance Limits Insurance Limits 0 20,000 40,000 60,000 80, AU BE DE DK FR GR IE IT NL PO SP Limit 2008 Limit 2009 Figure: Deposit Insurance Limits - Euro Countries
9 Data Sources Banks data from 2006 to 2015 Standard balance-sheet characteristics (Bankscope) Detailed composition of funding Total Deposits, Deposit expenses (both as rates and abs value) Deposit Insurance Deposit Insurance dataset (World Bank) JRC report on covered and eligible deposits only National deposit insurance institutions Macroeconomic variables Public debt/gdp, GDP growth etc.. OECD dataset
10 EMPIRICAL STRATEGY
11 Two Empirical Challenges 1. Increase in DIL is not randomly assigned to countries 2. Italian banks are the only control group
12 Two Empirical Challenges 1. Increase in DIL is not randomly assigned to countries We run a diff-in-diff on cross-country aggregated data 2. Italian banks are the only control group
13 Two Empirical Challenges 1. Increase in DIL is not randomly assigned to countries We run a diff-in-diff on cross-country aggregated data 2. Italian banks are the only control group We run a diff-in-diff on granulated data to exploit within-banks variation
14 Two Empirical Challenges 1. Increase in DIL is not randomly assigned to countries We run a diff-in-diff on cross-country aggregated data 2. Italian banks are the only control group We run a diff-in-diff on granulated data to exploit within-banks variation Perform a propensity score matching to improve the quality of the treated group as in Lambert et al (2017)
15 Deposit Rates - Italy vs Average Treated Interest Rate Treatment and Control group Weighted Average Rate Fiscal Year Treated European Italy Figure: Deposit Rates - Treated Group and Italy parallel trend
16 Cross-Country Summary Statistics Table: Aggregated Data - Summary Statistics (1) (2) Treated Non-Treated mean mean Weighted deposit interest rate Growth rate Total deposits Growth rate real GDP Unemployment rate Public debt over GDP Covered to eligible ratio Ratio of deposits by top 5 institutions Ratio of deposits by top 20 institutions Herfindal index Observations 30 3
17 Cross-Country Summary Statistics Table: Aggregated Data - Summary Statistics (1) (2) Treated Non-Treated mean mean Weighted deposit interest rate Growth rate Total deposits Growth rate real GDP Unemployment rate Public debt over GDP Covered to eligible ratio Ratio of deposits by top 5 institutions Ratio of deposits by top 20 institutions Herfindal index Observations 30 3
18 Cross-Country Summary Statistics Table: Aggregated Data - Summary Statistics (1) (2) Treated Non-Treated mean mean Weighted deposit interest rate Growth rate Total deposits Growth rate real GDP Unemployment rate Public debt over GDP Covered to eligible ratio Ratio of deposits by top 5 institutions Ratio of deposits by top 20 institutions Herfindal index Observations 30 3 Need to check for cross-country heterogeneity
19 MAIN RESULTS
20 Outline of Results Cross-Country analysis: when DI limit increases, banks Decrease deposit rates the greater the amount of uncovered deposits before the increase the lower the debt-to-gdp ratio Total deposits only increase for low levels of Public Debt/GDP Bank-Level analysis: when DI limit increases, banks Decrease deposit rates Riskier banks decrease deposit rates more Riskier banks no longer need to compete for deposits with safer banks and can reduce deposit rates more We consider liquidity risk measured with credit lines
21 Cross-Country Baseline WeightedRates ct = γ c + λ t + δ(t c post t ) + ɛ ct Observation at the (c, t) country-period level
22 Cross-Country Baseline WeightedRates ct = γ c + λ t + δ(t c post t ) + ɛ ct Observation at the (c, t) country-period level WeightedRates ct : Average Deposit Rates in country c at time t weighted by total deposits
23 Cross-Country Baseline WeightedRates ct = γ c + λ t + δ(t c post t ) + ɛ ct Observation at the (c, t) country-period level WeightedRates ct : Average Deposit Rates in country c at time t weighted by total deposits T c dummy variable equals 1 if increase in insurance limit
24 Cross-Country Baseline WeightedRates ct = γ c + λ t + δ(t c post t ) + ɛ ct Observation at the (c, t) country-period level WeightedRates ct : Average Deposit Rates in country c at time t weighted by total deposits T c dummy variable equals 1 if increase in insurance limit post t dummy variable if year 2009
25 Cross-Country Baseline WeightedRates ct = γ c + λ t + δ(t c post t ) + ɛ ct Observation at the (c, t) country-period level WeightedRates ct : Average Deposit Rates in country c at time t weighted by total deposits T c dummy variable equals 1 if increase in insurance limit post t dummy variable if year 2009 Fixed effects γ c and time effects λ t
26 Baseline Results WeightedRates ct = γ c + λ t + δ(t c post t ) + ɛ ct Table: Cross Country Analysis - Robustness Panel A T post Year Dummies Fixed Effects Weighted Deposit Rates (1) (2) (3) (0.0023) Excluding France No Sovereign Crisis (years) Observations Adjusted R deposits
27 Baseline Results WeightedRates ct = γ c + λ t + δ(t c post t ) + ɛ ct Panel A Table: Cross Country Analysis - Robustness Weighted Deposit Rates (1) (2) (3) T post (0.0023) (0.0025) Year Dummies Fixed Effects Excluding France No Sovereign Crisis (years) Observations Adjusted R deposits
28 Baseline Results WeightedRates ct = γ c + λ t + δ(t c post t ) + ɛ ct Panel A Table: Cross Country Analysis - Robustness Weighted Deposit Rates (1) (2) (3) T post (0.0023) (0.0025) (0.0017) Year Dummies Fixed Effects Excluding France No Sovereign Crisis (years) Observations Adjusted R deposits
29 Cross-Country Heterogeneity What countries drive our results? WeightedRates ct =γ c + λ t + δ(t c Hc post t ) + ɛ ct Sample splitting 1. H c Cover to Eligible Ratio CtE c 2. H c Public Debt to GdP Ratio pd c We always use Italy as a control country
30 Eligible and Covered Deposits Bank deposits in country A with e20, 000 Limit A E C 2008 Eligible Deposits Covered Deposits
31 Eligible and Covered Deposits Bank deposits in country A with e100, 000 Limit A E A E C C Eligible Deposits Covered Deposits
32 Exposure to Increase in Deposit Insurance CtE c = CoveredDeposits c EligibleDeposits c [0, 1] Covered-to-Eligible Deposits Covered to Eligible Deposits AT BE DE DK ES FR GR IE IT NL PT Figure: Total Covered Deposits over Eligible Deposits - JRC Data
33 Cross-Country Heterogeneity: CtE Ratio WeightedRates ct =γ c + λ t + δ(t c Hc post t ) + ɛ ct H c = 1 CtEc p50(cte) H c = 1 H c = 0 Panel A (1) (2) (3) (4) Deposit Rates Log Tot Deposits Deposit Rates Log Tot Deposits T H c post (0.0025) (0.1147) (0.0061) (0.0950) Year Dummies Country Fixed Effects Observations Adjusted R
34 Cover to Eligible Banks decrease deposit rates in countries with lower levels of covered deposits in the pre-period Banks pass through higher DI costs to depositors No effect on total deposits r S r 0 D D 0 Deposits
35 Cover to Eligible Banks decrease deposit rates in countries with lower levels of covered deposits in the pre-period Banks pass through higher DI costs to depositors No effect on total deposits r S r 0 D D D 0 Deposits
36 Cover to Eligible Banks decrease deposit rates in countries with lower levels of covered deposits in the pre-period Banks pass through higher DI costs to depositors No effect on total deposits r S r 0 r 1 S D D D 10 Deposits
37 Cross-Country Heterogeneity: Debt-to-GDP WeightedRates ct =γ c + λ t + δ(t c Hc post t ) + ɛ ct H c = 1 pdc p50(pd) H c = 1 H c = 0 Panel A (1) (2) (3) (4) Deposit Rates Log Tot Deposits Deposit Rates Log Tot Deposits T H c post (0.0030) (0.0811) (0.0041) (0.1283) Year Dummies Country Fixed Effects Observations Adjusted R
38 Debt to GDP Banks decrease deposit rates in countries with lower levels of Public Debt/GDP Depositors perceive DI as credible if government has greater spending capacity Increase in supply is stronger than pass-through of higher costs r S r 0 D D 0 Deposits
39 Debt to GDP Banks decrease deposit rates in countries with lower levels of Public Debt/GDP Depositors perceive DI as credible if government has greater spending capacity Increase in supply is stronger than pass-through of higher costs r S r 0 D D D 0 Deposits
40 Debt to GDP Banks decrease deposit rates in countries with lower levels of Public Debt/GDP Depositors perceive DI as credible if government has greater spending capacity Increase in supply is stronger than pass-through of higher costs r S r 0 r 1 S D D D 0 D 1 Deposits
41 Bank-Level Analysis Does cross-country analysis capture all the effects? Granulated data allows us to exploit within-bank variation Propensity score matching restricts treated banks to more comparable banks Explore banks behaviour with risk
42 Bank-Level Summary Statistics Table: Summary Statistics (1) (2) Treatment Control mean mean Total Assets Total deposit over Total Assets Tier 1 capital over Total Assets Net Loans over Total Assets Impaired Loans over Total Assets Government Bonds over Total Assets Committed Credit Lines ROA ROE Observations
43 Bank-Level Summary Statistics Table: Summary Statistics (1) (2) Treatment Control mean mean Total Assets Total deposit over Total Assets Tier 1 capital over Total Assets Net Loans over Total Assets Impaired Loans over Total Assets Government Bonds over Total Assets Committed Credit Lines ROA ROE Observations
44 Bank-Level Summary Statistics Table: Summary Statistics (1) (2) Treatment Control mean mean Total Assets Total deposit over Total Assets Tier 1 capital over Total Assets Net Loans over Total Assets Impaired Loans over Total Assets Government Bonds over Total Assets Committed Credit Lines ROA ROE Observations Need to match treatment and control on banks characteristics
45 Propensity Score Matching (PSM) We follow Lambert et. al (2017): M ic =α + β 1 Ta ic + β 2 Tier1 ic + β 3 ROA ic + + β 4 GvBonds ic + β 5 AvClines ic + ɛ ic We restrict our control group with a PSM probit estimation: Total Assets, Tier1 Equity, ROA, Gov. Bonds, Credit Lines Nearest Neighbour matching with Caliper 0.1 No replacement We match our treatment and control in the post period
46 Bank-Level Baseline Results DepRates ict = γ i + λ t + δ(t c post t ) + ɛ ict (1) (2) Deposit Rates Log Total Deposits T c post (0.0103) (0.0547) Year Dummies Country Fixed Effects Observations Adjusted R
47 Do Depositors Monitor Banks? Do riskier banks decrease deposit rates? Riskier banks no longer need to compete with safer banks for deposits Riskier banks paid higher deposit rates to depositors before the policy change They can now reduce the deposit rates more as depositors no longer monitor them We measure liquidity risk as cl ict = Undrawn Credit Lines ict Total Deposits ict Higher cli, greater liquidity risk
48 Do Depositors Monitor Banks? y ict =γ i + λ t + δ(t post t ) + φ(cl i +post t )+ + α(t cl i post t ) + ɛ ict (1) (2) Deposit Rates Log Total Deposits T c post (0.0072) (0.1153) Year Dummies Country Fixed Effects Observations Adjusted R
49 Conclusions We exploited an exogenous variation in the EU increase in DI to study its effect on the banking industry Banks pass through higher costs to depositors Deposits do not change Riskier banks decrease risk more We undergo a cross-country and bank-level analysis Next steps: Do riskier banks exploit low-monitoring to undertake greater risk? Quantile regression
50 BACK-UP SLIDES
51 Deposits as Risk-Sharing Contracts Depositors face liquidity shocks: Banks entail maturity transformation and provide higher insurance, the higher are deposit rates Higher deposit rates increase run probability Higher deposit insurance reduce run probabilities and allow banks to increase deposit rates back
52 Deposit Rates - Italy vs Average Treated Event Study Analysis weight_rates T Year relative to 2008 ltot_dep T Year relative to 2008 γt CI 95% γt CI 95% Figure: Deposit Rates - Treated Group and Italy back
53 Eligible and Covered Deposits Bank deposits in country A with e20, 000 Limit A E C 2007 Eligible Deposits Covered Deposits
54 Eligible and Covered Deposits Bank deposits in country A with e100, 000 Limit A A E C Eligible Deposits Covered Deposits
55 Baseline Results LodDeposits ct = γ c + λ t + δ(t c post t ) + ɛ ct Panel A Table: Cross Country Analysis - Robustness T post (0.082) Log Total Deposit (1) (2) (3) Year Dummies Fixed Effects Excluding France No Sovereign Crisis (years) Observations Adjusted R back
56 Baseline Results LodDeposits ct = γ c + λ t + δ(t c post t ) + ɛ ct Panel A Table: Cross Country Analysis - Robustness Log Total Deposit (1) (2) (3) T post (0.082) (0.0088) Year Dummies Fixed Effects Excluding France No Sovereign Crisis (years) Observations Adjusted R back
57 Baseline Results LodDeposits ct = γ c + λ t + δ(t c post t ) + ɛ ct Panel A Table: Cross Country Analysis - Robustness Log Total Deposit (1) (2) (3) T post (0.082) (0.0088) (0.0617) Year Dummies Fixed Effects Excluding France No Sovereign Crisis (years) Observations Adjusted R back
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