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Conference of 2007
Finance Center Münster
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Theory predicts that fully insured depositors never will withdraw their savings prematurely to avoid the negative consequences of bank runs (Diamond and Dybvig (1983)). However, the bank run on Northern Rock in the U.K. demonstrates that depositors may rapidly lose their trust in the solvency of their bank in case of a serious crisis. Therefore, it is essential that the public is informed about the benefits and limitations of a deposit insurance system (Financial Stability Forum (2001)). It is surprising that there is hardly any empirical work on this issue and a study of the complex relationship between i) the extent of knowledge about insurance systems, ii) the demand for deposit security, and iii) the perceived degree of deposit security is lacking. Additionally, our paper extends the literature in the following directions. First, the investigation of our research questions for Germany is especially interesting since although Germany has three private deposit insurance schemes, the German banking system is generally regarded as a very stable system with secure deposits. Second, there is currently no thorough empirical study on the effect of banks' reputation on the perceived level of deposit security. Therefore, we develop the construct of perceived deposit security and present the results of an exploratory study examining the impact of bank's reputation on perceived deposit security. Thus, we analyze the following questions: 1. Do private depositors have a sound understanding of the deposit insurance systems? 2. Is the security of deposits important for investment decisions of private depositors? 3. Do private depositors perceive their deposits to be safe? 4. Do private depositors assign banks different levels of deposit security? And if so, can these differences in perceived deposit security be partly explained by differing reputation levels of the banks? We will shed light on these questions by analyzing a comprehensive survey (756 private investors) which was conducted between October and December 2007. The results indicate that although the security of deposits seems to be important to German depositors, they are relatively ill-informed about the deposit insurance systems. Despite their lack of knowledge, German depositors are confident of the security of their deposits. Additionally, the findings show that depositors indeed perceive differences in the safety levels across banks. These differences can be partly explained by the banks' reputation. Furthermore, our study reveals that depositor characteristics play an important role regarding knowledge about, demand for, and perception of deposit insurance.
Abstract
Deposit insurance: An empirical study of private investor's knowledge and perception
Sträter, Norbert; Cornelißen, Markus; Pfingsten, AndreasTheory predicts that fully insured depositors never will withdraw their savings prematurely to avoid the negative consequences of bank runs (Diamond and Dybvig (1983)). However, the bank run on Northern Rock in the U.K. demonstrates that depositors may rapidly lose their trust in the solvency of their bank in case of a serious crisis. Therefore, it is essential that the public is informed about the benefits and limitations of a deposit insurance system (Financial Stability Forum (2001)). It is surprising that there is hardly any empirical work on this issue and a study of the complex relationship between i) the extent of knowledge about insurance systems, ii) the demand for deposit security, and iii) the perceived degree of deposit security is lacking. Additionally, our paper extends the literature in the following directions. First, the investigation of our research questions for Germany is especially interesting since although Germany has three private deposit insurance schemes, the German banking system is generally regarded as a very stable system with secure deposits. Second, there is currently no thorough empirical study on the effect of banks' reputation on the perceived level of deposit security. Therefore, we develop the construct of perceived deposit security and present the results of an exploratory study examining the impact of bank's reputation on perceived deposit security. Thus, we analyze the following questions: 1. Do private depositors have a sound understanding of the deposit insurance systems? 2. Is the security of deposits important for investment decisions of private depositors? 3. Do private depositors perceive their deposits to be safe? 4. Do private depositors assign banks different levels of deposit security? And if so, can these differences in perceived deposit security be partly explained by differing reputation levels of the banks? We will shed light on these questions by analyzing a comprehensive survey (756 private investors) which was conducted between October and December 2007. The results indicate that although the security of deposits seems to be important to German depositors, they are relatively ill-informed about the deposit insurance systems. Despite their lack of knowledge, German depositors are confident of the security of their deposits. Additionally, the findings show that depositors indeed perceive differences in the safety levels across banks. These differences can be partly explained by the banks' reputation. Furthermore, our study reveals that depositor characteristics play an important role regarding knowledge about, demand for, and perception of deposit insurance.