Deposit Insurance and Depositor Behavior: Evidence from Colombia

Deposit Insurance is a key factor in maintaining the stability and resilience of financial systems. This form of financial regulation has been extensively used in history, around the world, and during the 2008 financial crisis. Despite notable theoretical work in this area, there is a limited number of empirical studies exploring the behavioral consequences of deposit insurance on depositors. The reason is that changes in deposit insurance usually happen in times of financial turmoil, and it is difficult to obtain high-frequency data from bank accounts. Our work aims to answer a simple question: does deposit insurance affect deposit behavior? If so, by how much?

This issue is particularly important because depositors’ responses to deposit insurance may alter the level of savings in bank accounts, which in turn affects the provision of credit and therefore investment. If we consider deposit insurance as creating a safe asset, low levels of deposit insurance in medium-to-low-income countries may explain their low levels of formal savings.

We study the effect of an unexpected change in deposit insurance in Colombia on depositor behavior, using unique data on monthly deposits from a large Colombian bank, covering more than 50,000 individuals between 2016 and 2018. We also present the results from a survey of the bank’s customers to uncover which assets were liquidated in the aftermath of the policy change. The literature on the subject has focused on banks’ moral hazard and not on depositors for two main reasons. First, accessing depositor-level information is difficult, as financial institutions are not obliged to disclose such data by regulators. Second, most changes in deposit insurance take place during periods of financial turbulence, and as a result, separating the effect of deposit insurance from concurrent economic shocks is challenging.

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Our work studies the effect of deposit insurance on depositors exploiting an unexpected policy change (illustrated in Figure 1). On April 18, 2017, the Colombian deposit guarantee fund (Fondo de Garantías de Instituciones Financieras) increased the insurance for individual deposits from 20 million Colombian pesos (COP) (approximately 6,780 USD at the average exchange rate of 2017 of around 2,950 COP/USD) to 50 million COP (around 16,950 USD). The change was unexpected and the announcement to the public took place only one day after its implementation. Contrary to most changes in deposit insurance, which happen during financial crises, this increase aimed to update the real value of the insurance threshold, which had not been changed since 2000.

Our identification strategy combines this increase in time with a measure of cross-sectional exposure at the depositor level. We assign individuals to one of four bins according to their average monthly deposits before the policy change. Bin 1 includes depositors with average deposits between 5 million and 20 million COP, and who were therefore fully insured before the policy change. Bin 2 includes individuals with 20 million to 50 million COP and who were partially insured before the change and completely insured after the policy change. Individuals in Bins 3 and 4 have pre-policy deposits above 50 million COP and are therefore never fully insured. Using a difference-in-differences design, we study the differential response of individuals in each bin to the policy change.

Figure 1 — Timing of the Policy Change

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