Economic theory predicts that reciprocal brokered deposits, by enhancing deposit insurance coverage, may reduce market discipline for banks, permitting them to take more risk in various dimensions. A newly available dataset provides empirical evidence related to that hypothesis.

Even after controlling for other observable factors, reciprocal deposits are associated with higher bank risk as measured by the probability of failure and the Zscore. These results are consistent with the moral hazard hypothesis and reject the risk substitution hypothesis

Economic theory predicts that reciprocal brokered deposits, by facilitating an extension of deposit insurance coverage, may exacerbate moral hazard and reduce market discipline for banks, permitting them to take more risk in various dimensions. Using a newly available dataset, this note explores...