Discussion of the paper: Deposit Insurance and Deposit Products

1. Discussion of the paper: Deposit Insurance and Deposit Products Discussant BrankoUrošević, Faculty of Economics, University of Belgrade and National Bank of Serbia Moscow, November 9th, 2012

2. 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

3. 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))

4. 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).

5. 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

6. 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

8. 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 –> lower rates

9. Main results: preliminary regression analysis • Key findings in aggressive deposit growth segment: • Higher risk measures -> 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)

10. 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)

11. 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

12. 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

13. Comments, questions, suggestions • Proposed bank risk measure, ratio of insured to total deposits, implies potentially stronger market discipline (Caprio, Honahan (2004)) -> 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 -> 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 -> 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

15. 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