How does Deposit Insurance Affect Credit Risk of Banks? Evidence from Russia

On the one hand, deposit insurance system serves as a tool for protecting depositors and boost their confidence in the banking sector. On the other hand, deposit insurance system has detrimental influence on banking system, because it weakens market discipline and strengthens the moral hazard problem. The aim of this study is to identify the type of impact of deposit insurance system on credit risk of Russian banks for the period from 2004 to 2015. Next characteristics were chosen as proxies for the deposit insurance system: the amount of insurance coverage for deposits and the rate of banks’ insurance premium. As a result of this study, quadratic relation of credit risk on the size of insurance coverage was identified, this fact indicates the existence of an optimal amount of insurance coverage. At the same time, there is no evidence of significant impact of insurance coverage on credit risk of banks in period of crisis . The growth of the rate of banks’ insurance premium allows to reduce the credit risk of banks and the introduction of the regime of differentiated rates of banks’ insurance premium also reduces the credit risk of Russian banks. It was also found that the public banks do not react to changes in the characteristics of the deposit insurance system, because they have an implicit guarantee of the state.