Deposit Insurance and Depositor Behavior: Evidence from Colombia

Abstract

This paper studies the effect of deposit insurance on depositor behavior. Our theoretical framework integrates insights from public and financial economics and predicts that (1) deposit insurance induces bunching at the threshold in the deposit distribution and (2) an increase in the insurance threshold promotes deposit growth, particularly higher for individuals bunching at the initial limit. We exploit a large and unexpected increase in the Colombian insurance together with monthly depositor-level records from a major bank to test these predictions. We validate the existence of bunching in deposits and quantify the heterogeneous effect of deposit insurance on individual deposit growth.