Deposit Insurance and Depositor Behavior: Evidence from Colombia

Abstract

We exploit an unexpected increase in the Colombian insurance threshold to investigate how depositors respond to higher deposit insurance. A monthly depositor-level panel shows that both the level and growth of deposits rise with higher coverage. This increment is driven by individuals who were fully and nearly-fully insured before the policy. A survey of bank customers indicates that higher bank deposits were replenished by reducing cash and liquidating other assets. We quantify an elasticity of deposit growth to deposit insurance of 0.4%, and find a similar figure in the United States by leveraging the 2008 increase in deposit insurance.

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