Private Deposit Insurance, Deposit Flows, and Bank Lending

Abstract

We examine the role of private deposit insurance for deposit flows and bank lending during a financial crisis. Exploiting the availability of private deposit insurance to banks in Massachusetts, we show that banks whose deposits are privately insured experience greater deposit inflows and expand lending during the recent crisis, in contrast to banks whose deposits are only federally insured. The deposit inflows are particularly pronounced prior to the increase of the federal deposit insurance limit and the introduction of the Transaction Account Guarantee Program. Our results highlight the complementary role of private sector solutions for the regulatory framework in banking.