Deposit Insurance Premiums and Bank Risk-Taking

Abstract

Deposit insurance premiums impose costs on banks' balance sheets, narrowing profit margins and inducing banks to "search for yield." This paper estimates the effects of deposit insurance premiums on bank risk-taking using supervisory data and a kink in the schedule of deposit insurance premiums. We show that deposit insurance premiums weaken bank demand for reserves--a liquid asset with no credit risk--and strengthen the supply of short-term interbank loans--a liquid asset with credit risk. We discuss the implications of these findings for optimal deposit insurance pricing and monetary policy implementation.