Does Deposit Insurance Promote Deposit Stability? Evidence from the Postal Savings System during the 1920s

Research question. Does deposit insurance promote financial depth by arresting the outflow of deposits from the banking system during periods of bank distress? The paper tests and quantifies the deposit-stabilizing effect of state-level deposit insurance schemes operating in the United States during the 1920s.

Setting and identification. Between 1908 and 1929, eight primarily Midwestern states adopted some form of deposit insurance. The paper exploits the discontinuity in deposit insurance coverage at state borders to identify the causal effect of insurance on depositor behavior. The identification strategy compares outcomes in contiguous city pairs straddling deposit-insurance (DI) and non-deposit-insurance (NDI) state borders — a quasi-experimental design that controls for observed and unobserved confounders by using narrow geographic areas where the only relevant policy difference is the presence or absence of deposit insurance.

Lee K. Davison | Macro Paper Warehouse

Does Deposit Insurance Promote Deposit Stability? Evidence from the Postal Savings System during the 1920s