DOES DEPOSIT INSURANCE MATTER? BEHAVIORAL EVIDENCE FROM INDONESIA

Abstract

This study aims to observe the relationship between deposit insurance characterizations and behavioral aspects (i.e. time and risk preferences) towards withdrawal decisions under hypothesized economic shock. Our sample is drawn from 154 depositors in Indonesia, 42 percent of which is classified as prime depositors – those holding a significant amount of third-party fund in savings. The findings suggest that the above-mentioned aspects have significant influences on withdrawal decisions conditional on certain scenarios of economic shocks. Furthermore, we found evidence showing that not only deposit insurance characterizations influence initial withdrawals, it also have important implications in deterring the contagion effect of massive withdrawal that may lead to the case of bank runs. We discuss our findings in relevance to the current developments of banking sector and financial issues in Indonesia.

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