Evren Damar (Hobart and William Smith Colleges – The Run from Safety: How a Change to the Deposit Insurance Limit Affects Households' Portfolio Allocation

joint with Reint Gropp, IWH and University of Magdeburg, and Adi Mordel, Bank of Canada
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This paper examines the effect of a change in deposit insurance limit on household portfolio allocation. We use a 2005 increase in the deposit insurance limit in Canada from 60,000 CAD to 100,000 CAD, along with detailed information on the holdings of insured and uninsured deposits at the household level. An increase in deposit insurance represents an exogenous shift towards safe assets in households’ portfolios, as a larger share of deposits becomes fully insured.

We document that banks consequently adjust rates on large deposits and that households respond by shifting parts of their portfolios towards riskier assets outside the banking system. This is consistent with households attempting to maintain a constant allocation between safe and risky assets, as suggested by standard asset pricing models. Overall, we estimate that about 2.7 percent of all outstanding deposits in Canada were moved to risky assets outside the banking system following the limit change.

Friday, June 23, 2017, 11:00 pm

Oesterreichische Nationalbank
Otto-Wagner-Platz 3, 1090 Wien

Please register until Wednesday, June 21, 2017