TAILIEUCHUNG - Deposit Insurance, Institutions and Bank Interest Rates

The structure of the paper is as follows. Section 2 discusses the literature on both measuring competition and the bank interest rate pass-through. Section 3 describes the Boone indicator of competition and Section 4 the employed interest rate pass-through model of the error-correction type and the applied panel unit root and cointegration tests. Section 5 presents the various data sets used. The results on the various tests and estimates of the spread model and the error correction model equations are shown in Section 6. Finally, Section 7 summarises and concludes | Columbia University Department of Economics Discussion Paper Series Deposit Insurance Institutions and Bank Interest Rates Francesca Carapella Giorgio Di Giorgio Discussion Paper No. 0304-06 Department of Economics Columbia University New York NY 10027 November 2003 Deposit Insurance Institutions and Bank Interest Rates1 by Francesca Carapella and Giorgio Di Giorgio First and preliminary draft September 2003 This draft October 2003 Abstract Many recent institutional reforms of the financial system have relied on the introduction of an explicit scheme of Deposit Insurance. This instrument aims at two main targets contributing to systemic stability and protecting depositors. However it may also affect the interest rate spread in the banking system which can be viewed as an indicator of market power in this financial segment. This paper provides an empirical investigation of the effect of deposit insurance and other institutional and economic variables on bank interest rates across countries. We find that deposit insurance increases the lending borrowing spread in banking. The main effect seems to arise not from the deposit side though but from an increase in the lending rate. We interpret this result as evidence of the presence of moral hazard problems related to this instrument. We also find that higher quality of institutions is associated with lower spreads thus contributing to eroding sources of market power in the banking sector. Keywords Deposit Insurance Institutions Interest Rates JEL G20 G28 Università LUISS Guido Carli and University of Minnesota . Università LUISS Guido Carli and Columbia University Correspondence to Giorgio Di Giorgio Università LUISS Guido Carli Viale Pola 12 00198 Roma Tel 39-06-85225739. Email gdg@ 1We thank Francesco Nucci for useful comments on a first draft of the paper. Guido Traficante provided useful research assistance. This paper is part of a research project on the role of deposit insurance in the financial .

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