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 excessive 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 financial stability.

The Federal Reserve’s AMLF program was designed to provide liquidity to money market funds (MMFs). Between September 2008 and May 2009, the program made $217 billion in non-recourse loans to depository institutions and bank holding companies to purchase asset-backed commercial paper from MMFs. JP Morgan and State Street dominated the program, accounting for over 90% of all loans made. Our analysis suggests that JP Morgan exhibited more self-dealing behavior than State Street. We find that JP Morgan and State Street earned economically and statistically significant cumulative returns of 2.28% and 2.49% (respectively) over the first seven days of the program after controlling for market returns and heteroscedasticity.