Discussion of the paper: Deposit Insurance and Deposit Products

1
Discussion of the paper Deposit Insurance and
Deposit Products

• Discussant
• Branko Uroševic, Faculty of Economics, University
  of Belgrade and National Bank of Serbia
• Moscow, November 9th, 2012

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Deposit insurance and market discipline

• Vast theoretical and empirical literature exists
  on relationship between deposit insurance and
  market discipline
• Dybvig and Diamond (1983) deposit insurance may
  prevent bank runs in a socially-optimal way
• Demirguc-Kunt and Detragiache (2002) DI can lead
  to increase in risk-taking by banks and reduction
  of borrower incentives to monitor banks, thus
  reduction of market discipline
• DI creates less problems in countries with more
  developed institutions and market info, more
  problems in emerging economies

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Market discipline in emerging markets

• Market discipline quantity and/or price impact
• Caprio, Honahan (2004) argue that market
  discipline can work even in unsophisticated mkts
  provided
• Products not complex
• Significant presence of foreign banks
• Money in smaller number of hands
• Calomiris, Powell (2001) market discipline
  worked in Argentina (written prior to the
  collapse)
• Examples from Poland (Mondshean, Opiela (1999),
  Latin America (Martinez-Peria, Schmukler (2004))

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Case of Russia

• Russia provides an interesting lab to study these
  issues since
• Three large scale banking crises in 1990ies alone
• From 2004, government DI scheme introduced and
  became obligatory for banks that accept retail
  deposits
• Chernykh and Kole (2011) show that DI helped
  develop Russian banking industry (through
  increased confidence) but also increased moral
  hazard behavior
• Karas et al (2010) for pre DI Russian mkt
  evidence of quantity-based market discipline, no
  evidence of direct price-based discipline (argue,
  however, that depositors view increase in
  interested rates offered as a risk measure, thus
  reduce volume)
• Ungan et al (2008) for early stages of DI
  evidence of quantity-based market discipline, no
  evidence of price-based discipline ambiguous
  effects of DI on risk taking
• Peresetsky et al (2007) 26 banks (Sberbank
  excluded), 2004. Studies pricing of both RUB and
  foreign currency deposits. Different determinants
  (conjecture that foreign currency depositors more
  sophisticated).

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This paper

• Studies retail deposit market in Russia in the
  period April 2011-February 2012
• Collects almost 80,000 deposit contracts across
  371 most active Russian banks (state, foreign,
  and private Russian banks)
• A complete set of deposit contract features
• Collects various standard bank-level
  characteristics
• Looks at determinants of pricing retail RUB
  deposits including how deposit insurance may
  influence pricing

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Main results

• Shows that Russian banks offer sophisticated
  deposit products
• Product additional features mostly priced in (and
  need to be taken into account by regulators).
• From univariate exploration
• Uninsured (or rather partially insured) deposits
  (higher than 700,000 RUB) have about 70 bp
  premium, on average, with respected to insured
  ones.
• Interpreted as risk premium
• Banks with high lending activities and uninsured
  products by small banks have high interest rates

7
Main results preliminary regression analysis

• Explanatory variables
• deposit level characteristics insurance status,
  deposit size, maturities dummies, 12 indicators
  for various options
• bank level characteristics regulatory capital
  ratio, NPL ratio, private loans to assets, banks
  size, household to total deposits
• Dependent variable RUB deposit product interest
  rate

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Main results preliminary regression analysis

• Collapse 11 months of data into a cross section
• Key findings
• Uninsured dummy positive but barely significant
  for the overall sample, significant for private
  domestic banks and especially for aggressive
  deposit taking banks
• More capitalized banks offer lower rates for
  uninsured products than less capitalized banks
  (see a comment below, however) No such effect
  for insured products
• Less competition (regions), foreign, state banks
  gt lower rates

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Main results preliminary regression analysis

• Key findings in aggressive deposit growth
  segment
• Higher risk measures -gt higher deposit rates on
  fully insured deposits.
• Can be interpreted as mkt discipline at work.
• Also, can be that riskier banks exhibit moral
  hazard.
• The latter confirmed by the fact that higher
  proportion of household to total deposits leads
  to higher rates in fully insured contracts (and
  not in uninsured ones)

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Main results

• Uninsured contracts more sensitive to bank level
  risk than insured ones
• Aggressive deposit taking banks offer high
  premium to compete in insured market
• They conclude that ratio of insured to total
  deposits may be a good proxy for bank risk
  profile (see discussion below)

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Comments, issues, suggestions

• Overall, a very promising piece of empirical
  research
• An impressive undertaking in terms of data
  collection
• Not complete (missing part on quantity market
  discipline, literature review, conclusions)
• Results and conclusions make sense to me. One
  possible caveat
• Table 4 banks in upper quartile of regulatory
  capital ratio offer significantly higher interest
  rates than those in the lower quartile for
  insured products and not significantly different
  for uninsured
• does not seem to fit with the rest of the story
  and the results of the regression

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Comments, questions, suggestions

• Uninsured deposits are in fact larger than
  insured ones
• Depositors of larger amounts can demand higher
  interest rates no matter the bank risk.
• Premium may be, at least in part, deposit
  size-related
• Perhaps dummies to check if the effect stronger
  for larger deposit size brackets

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Comments, questions, suggestions

• Proposed bank risk measure, ratio of insured to
  total deposits, implies potentially stronger
  market discipline (Caprio, Honahan (2004)) -gt
  smaller credit risk
• However, is having a small number of large
  (uninsured) deposits less risky than having a lot
  insured ones?
• Not necessarily since exit of a few large
  depositors may cause trouble -gt higher deposit
  concentration/liquidity risk

14
Comments, questions, suggestions

• Missing clear motivation up front clearly state
  why you are doing what you are doing
• Household deposits increasingly important source
  of funds not just in Russia (shifts across
  Europe)
• Thus can be useful for broader European emerging
  markets
• Several novel results -gt authors need to clearly
  outline in the intro what is new and/or different
  with respect to the literature
• More careful policy analysis and potential impact
  needed

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Comments, questions, suggestions

• How about foreign currency deposits (for another
  paper, perhaps)?
• Quantity market discipline analysis (to be done)
  seems like a very important complement
• However, is 10 months enough to discern changing
  risk profiles of banks?
• Can consider also some other bank level measures
  (including liquidity/deposit concentration) in
  addition to current measures (maybe some of them
  work better, check the literature)
• Correct typos
• Overall, great work, learned a lot by reading it.
  Upon completion, recommend to everyone interested
  in banking