We explore how deposit insurance influences the allocation of deposits across banks, and in turn, the supply of credit to non-financial firms. Using administrative datasets from Denmark, including a deposit register covering the universe of retail deposit accounts, we study two reforms of the deposit insurance limit: first, during the 2008 Global Financial Crisis, which lifted the previous insurance limit to unlimited coverage; second, in 2010, when a European Union directive reinstated a limited coverage. We identify the impact of these reforms by analyzing changes in deposits: (1) across multiple banks by the same individual, and (2) at the bank level within a narrow window around the insurance threshold.

Our findings suggest that deposit reallocation resulting from deposit insurance benefits weaker banks that supply credit to less productive and riskier borrowers. This reallocation enables these banks to sustain elevated credit supply to worse borrowers.

Are depositors sleepy? We challenge the traditional view of depositor sleepiness by introducing a new notion, depositor alertness, and providing supporting evidence with novel transaction-level data from over a million U.S. depositors. Depositors shift their deposits across bank accounts more actively when the payment technology linked to their accounts is more efficient, and when they face higher interest rate risk, which we define as the payment channel and the interest risk channel, respectively. Furthermore, depositors facing higher payment frictions are also more attuned to interest rate risk and shift their deposits more actively, which we define as the precautionary transfer channel. Depositor alertness is particularly pronounced during periods of rate hikes but diminishes when rates fall. We further provide causal evidence with newly constructed exogenous shocks to payment frictions for depositors. Specifically, the exposure to fast payment technologies reduces transfer frictions, which consequently heightens depositor alertness. Our findings have significant policy implications, highlighting the impact of depositor behavior on bank funding costs and risks, especially amidst rapid developments in new payment technologies and during times of monetary tightening.

We study depositors’ reaction to negative rates on their checking and savings accounts, exploiting the fact that in 2020 most Dutch banks introduced negative rates on depositors’ balances above a time-varying threshold. Using the universe of transactions made by the clients of one of the largest banks, we document that depositors rationally reduced their excess balances between 30 and 60 per cent after the announcement of a new threshold. Initially, depositors mainly split their savings across multiple banks. As thresholds at all banks became lower and lower, depositors had to find other ways to avoid negative rates and increased financial investment through brokers and, partly, expenditure. The role of cash withdrawals is negligible.