Description:
This paper estimates the effect of deposit insurance on the risk-taking behaviour of banks. We present an experimental setup in which we exploit an increase in the coverage limit of deposit insurance in the US for identification. The identification of the treatment effect comes from the fact that state-chartered savings banks in Massachusetts had unlimited deposit insurance coverage at the time when it was increased for all other banks. We find that this increase in deposit insurance did not increase bank risk-taking, nor did it affect market discipline, evident through a lack of effect on deposit rates