The broad question is whether financial inclusion adds to financial instability. Here we focus on the narrow question of whether in the face of shocks, the small deposits of newly included households are likely to contribute to bank runs in the face of the closure of another bank nearby.
The literature on financial inclusion has tended to focus on the risks to a bank of lending to the smallest borrowers, while relying on imprecise aggregate data at the country level. In this paper, we focus on contagion risk with the advantage of granular bank deposit data at the town level. Our dataset allows us to distinguish deposits of different account sizes, including those sizes that are associated with financial inclusion. We are thus able to conduct careful event studies of the behaviour of these deposits around the closures of three different large banks.
In each of the three events we look at, we find no clear difference between the behavior of small depositors and that of large depositors. When a large bank is closed, we observe no significant withdrawals at other banks nearby by either small depositors or large ones. For two of the events, we do find some evidence that depositors, both large and small, anticipate that their bank is about to fail, and they start to withdraw before the bank is closed. This similarity of behavior suggests that financial inclusion is not likely to add to financial instability.
How susceptible to contagion are bank deposits associated with financial inclusion? To shed light on this question, we analyze the behavior of deposits of different account sizes around three significant bank closures in the Philippines. When we look at the three events by applying difference-in-difference regressions to a dataset that distinguishes between small and large deposits at the town level, we find no evidence that the closure of a large bank leads to withdrawals by depositors at other banks nearby, whether the depositors are large or small. For two of the events, we do find some evidence that depositors, both large and small, anticipate that their bank is about to fail, and they start to withdraw before the bank is closed. With more comprehensive branch-level data for one of the events, we find that a bank closure does lead to reduced deposits at bank branches nearby. All this suggests that, while a bank failure can lead to contagion, the behavior of small depositors is no different from that of large depositors, and thus financial inclusion is unlikely to add to financial instability.
JEL classification: G21, G28, C21, O35
Keywords: financial inclusion, financial stability, contagion, bank run, event study, selection bias
Read the full paper at: https://www.bis.org/publ/work724.htm