WORKING PAPER SERIES
Does Deposit Insurance Promote Financial
Depth? Evidence from the Postal Savings
System During the 1920s
Lee K. Davison
Federal Deposit Insurance Corporation
Carlos D. Ramirez
George Mason University and
Federal Deposit Insurance Corporation
November 2016
FDIC CFR WP 2017-02
fdic.gov/cfr
NOTE: Staff working papers are preliminary materials circulated to stimulate discussion and critical
comment. The analysis, conclusions, and opinions set forth here are those of the author(s) alone and do not
necessarily reflect the views of the Federal Deposit Insurance Corporation. References in publications to this
paper (other than acknowledgement) should be cleared with the author(s) to protect the tentative character
of these papers.
Does Deposit Insurance Promote Financial
Depth? Evidence from the Postal Savings
System During the 1920s
Lee K. Davison
Federal Deposit Insurance Corporation
Carlos D. Ramirez
George Mason University and
Federal Deposit Insurance Corporation
November 2016
FDIC CFR WP 2017-02
fdic.gov/cfr
NOTE: Staff working papers are preliminary materials circulated to stimulate discussion and critical
comment. The analysis, conclusions, and opinions set forth here are those of the author(s) alone and do not
necessarily reflect the views of the Federal Deposit Insurance Corporation. References in publications to this
paper (other than acknowledgement) should be cleared with the author(s) to protect the tentative character
of these papers.
Does Deposit Insurance Promote Financial Depth?
Evidence from the Postal Savings System During the 1920s
Lee K. Davison
Division of Insurance and Research
Federal Deposit Insurance Corporation
Washington, DC
and
Carlos D. Ramirez1
Department of Economics
George Mason University
Fairfax, VA 22030
Center for Financial Research, FDIC
Washington, DC
September 2016
Abstract:
This paper tests whether deposit insurance promotes financial depth by influencing depositor behavior.
To do so, we rely on two schemes operating in the U.S. during the 1920s: the Postal Savings System and
the deposit insurance schemes that some states had adopted. We exploit the discontinuity in deposit
insurance across state borders and compute changes in postal savings deposits in cities located along
the borders of states that did and did not have deposit insurance. We examine the relative growth of
postal savings deposits in pairs of border cities when bank suspensions occurred within a short radius
(10, 20, and 30 miles). Our results indicate that, following a bank suspension within a 10-mile radius,
deposits in postal savings offices located in the non-deposit insurance state increased by 16 percent
more than deposits in the neighboring postal savings office located in the deposit insurance state. The
magnitude of the effect declines with bank suspension distance. It disappears when deposit insurance is
not in effect. Using county-level data, we find that deposit insurance is associated with a 56 percent
increase in local banking capacity.
Keywords: bank failures; Postal Savings deposits; deposit insurance; banking capacity
JEL Classification Codes: N12, N22, E44, G21, G23
1 Corresponding author. E-mails: ldavison@fdic.gov (Lee Davison) and cramire2@gmu.edu (Carlos Ramirez). We
would like to thank Peter Bernstein for his very capable research assistance. We would also like to thank Ed Kane,
Haluk Unal, and Jack Reidhill and participants at an FDIC seminar for comments and suggestions. Ramirez gratefully
acknowledges financial and logistical support from the Center for Financial Research at the FDIC. The views
expressed in this paper do not necessarily reflect those of the FDIC.
Evidence from the Postal Savings System During the 1920s
Lee K. Davison
Division of Insurance and Research
Federal Deposit Insurance Corporation
Washington, DC
and
Carlos D. Ramirez1
Department of Economics
George Mason University
Fairfax, VA 22030
Center for Financial Research, FDIC
Washington, DC
September 2016
Abstract:
This paper tests whether deposit insurance promotes financial depth by influencing depositor behavior.
To do so, we rely on two schemes operating in the U.S. during the 1920s: the Postal Savings System and
the deposit insurance schemes that some states had adopted. We exploit the discontinuity in deposit
insurance across state borders and compute changes in postal savings deposits in cities located along
the borders of states that did and did not have deposit insurance. We examine the relative growth of
postal savings deposits in pairs of border cities when bank suspensions occurred within a short radius
(10, 20, and 30 miles). Our results indicate that, following a bank suspension within a 10-mile radius,
deposits in postal savings offices located in the non-deposit insurance state increased by 16 percent
more than deposits in the neighboring postal savings office located in the deposit insurance state. The
magnitude of the effect declines with bank suspension distance. It disappears when deposit insurance is
not in effect. Using county-level data, we find that deposit insurance is associated with a 56 percent
increase in local banking capacity.
Keywords: bank failures; Postal Savings deposits; deposit insurance; banking capacity
JEL Classification Codes: N12, N22, E44, G21, G23
1 Corresponding author. E-mails: ldavison@fdic.gov (Lee Davison) and cramire2@gmu.edu (Carlos Ramirez). We
would like to thank Peter Bernstein for his very capable research assistance. We would also like to thank Ed Kane,
Haluk Unal, and Jack Reidhill and participants at an FDIC seminar for comments and suggestions. Ramirez gratefully
acknowledges financial and logistical support from the Center for Financial Research at the FDIC. The views
expressed in this paper do not necessarily reflect those of the FDIC.