Deposit protection in a paternalistic state: The Russian case

Abstract

This paper places the institution of bank deposit protection in the context of government paternalism. I apply the theories of deposit insurance, merit goods, patronized goods, government paternalism, and institutional change to the analysis of the Russian case. The paper relies on statistical data from the Central Bank of Russia, Deposit Insurance Agency, and Rosstat. The findings are five-fold: (1) There is similarity between theoretical justification for government paternalism and intervention in household savings and the humanitarian sphere; (2) Deposit protection fits well the Russian institutional setup, due to its paternalistic nature; (3) The public choice-driven purpose of government intervention in household savings may change in the process. Patronage of small savers becomes camouflage for protection of private banks; (4) Deposit guarantee redistributes wealth from the public sector to the private one; (5) Deposit guarantee hinders the evolution of the market discipline and responsibility while fostering opportunistic behavior patterns among depositors and banks. The research implication of the paper is that, in the absence of strict eligibility criteria for merit goods, one can identify goods and services that probably do not belong there but sneak into that category by means of a manipulated public choice and thus get similar treatment with traditional humanitarian sectors. The policy implication is that the authorities might wish to tackle opportunistic behavior at source, i.e. by amending the parameters of the deposit insurance scheme.