Risk-based deposit insurance, deposit rates and bank failures: Evidence from Russia

Using the Russian banking system as a laboratory, we study the effect of a switch from fixed-rate deposit insurance to a risk-based system with premia tied to insured deposit rates offered by a bank. After the switch, increases in bank risk lead to reduced reliance on insured deposits, private banks without ex-cessive capital stop raising insured deposit rates to fund loan growth, and the cost of insured deposits becomes a predictor of bank failures (beyond the CAMEL variables). Offering insured deposit rates notably above the market becomes a last resort to banks. The results suggest that risk-based deposit insurance schemes discouraging high insured deposit rates may help reduce bank moral hazard and improve finan-cial stability. (c) 2022 Elsevier B.V. All rights reserved.