1. Deposit Insurance in Times of Crises Safe Haven or Regulatory Arbitrage?
Shusen Qi
Maastricht University; Xiamen University
Stefanie Kleimeier
Maastricht University; Open Universiteit; University of Stellenbosch Business School
Harald Sander
Technische Hochschule Köln; Maastricht School of Management
IADI 2017 Biennial Research Conference
June 1-2, 2017

2. The Rise and Retrenchment of CBD
Cross-border deposits (CBD) increased rapidly before the global financial crisis, but there is a retrenchment after the crisis

3. The Uneven Geography of CBD
Cross-border deposits (CBD) increased rapidly before the global financial crisis, but there is a retrenchment after the crisis

4. Where Do We Stand
Deposit insurance influences attractiveness of national banking market
DI directly protects depositor by reducing bank runs and increasing banking stability (Diamond & Dybvig, 1983)
DI introduces bank moral hazard and decreases banking stability (Demirgüç-Kunt & Detragiache, 1997, 2002; Rossi, 1999)
Limited empirical evidence
Lane & Sarisoy (2000): private capital inflows to developing countries are unrelated to explicit DI
Huizinga & Nicodème (2006): non-bank external liabilities increase after introduction of an explicit DI, specific DI features do not matter

5. What Questions Do We Ask
Does deposit insurance (DI) matter to cross-border depositors, including explicit DI and DI design features?
Are cross-border depositors attracted by safe havens or do they engage in regulatory arbitrage?
Does this behaviour change between stable and crisis times?
What effects did emergency actions of 2008/09 crisis have on cross-border depositors?

6. What Do We Find
Existence of explicit DI and DI design features matter for CBD
In stable times, both “Safe Haven” and “Regulatory Arbitrage” matter
In times of crises, DI acts primarily as a “Safe Haven” and stimulates “Regulatory Arbitrage” only to a limited extent
Emergency actions during 2008/09 crisis maintain the safe havens and have led to substantial relocations of cross-border deposits

7. Data: BIS locational banking statistics
22 bank countries, 131 customer countries
Bilateral
Principle of residence
Cross-border deposits from non-bank customers
Outstanding volumes adjusted for exchange rate changes
Annual data
Testing Safe Haven, Regulatory Arbitrage and Crisis Hypothesis:
Testing Emergency Action Hypothesis: /

8. Data: Deposit Insurance

9. Data: Deposit Insurance in 2006

10. Data: Deposit Insurance in 2006

11. Data: Deposit Insurance in 2006

12. Data: Systemic Banking Crises
A country’s corporate and financial sectors experience a large number of defaults and financial institutions and corporations face great difficulties repaying contracts on time
Laeven & Valencia (2008, 2010, 2012)
Countries
Start/end of crises
Crises from
Only in depositor countries
Crisis of 2008/09
Both in bank and depositor countries

13. Hypothesis 1 H1: Safe Haven Hypothesis
Compared to bank countries without an explicit DI, the existence of an explicit DI makes a bank country more attractive for cross-border depositors. In addition, the attractiveness of a bank country for cross-border depositors increases with the strength of its DI scheme relative to the strength of other bank countries’ DI schemes

14. Introduction of explicit DI ⇒ 82% increase in CBD
+1 unit DI power ⇒ +3% CBD
+1 unit DI moral hazard mitigation ⇒ +5% CBD
+1 unit DI coverage intensity ⇒ +7% CBD
+10 % DI coverage limit⇒ +5.5% CBD

17. Hypothesis 2 H2: Regulatory Arbitrage Hypothesis
The existence of an explicit DI makes a bank country attractive for cross-border depositors from countries that lack an explicit DI. In addition, the attractiveness of a bank country for cross-border depositors increases with the strength of bank country’s DI scheme relative to the strength of depositor country’s DI scheme

19. Hypothesis 3 H3: Safe Haven in Crisis Hypothesis
The importance attributed by cross-border depositors to the existence and strength of the bank country’s DI increases when depositors experience a banking crisis at home

21. Hypothesis 4 H4: Regulatory Arbitrage in Crisis Hypothesis
The importance attributed by cross-border depositors to the existence and strength of the bank country’s DI relative to the depositor country’s DI increases when depositors experience a banking crisis at home

23. Hypothesis 5 H5: Emergency Actions Hypothesis
The emergency actions taken by the bank country regarding its explicit DI ensure that the bank country remains an attractive safe haven for cross-border depositors

25. What Do We Find
Existence of explicit DI and DI design features matter for CBD
In stable times, both “Safe Haven” and “Regulatory Arbitrage” matter
In times of crises, DI acts primarily as a “Safe Haven” and stimulates “Regulatory Arbitrage” only to a limited extent
Emergency actions during 2008/09 crisis maintain the safe havens and have led to substantial relocations of cross-border deposits

26. What Are the Policy Implications
DI schemes as well as emergency actions have sizeable effects on other countries in a financially interdependent world
Call for coordination among national regulators with respect to DI schemes and emergency actions
Especially countries with a high level of credibility should therefore also show a similar high level of global (and regional) responsibility in their actions
Our results are therefore also offering important insights for the controversially discussed design of a European deposit insurance scheme