Deposit Insurance: Believers and Doubters
When investing in (almost) riskless assets, do investors always choose those offering the highest returns? Prof. Utpal Bhattacharya, from Hong Kong University of Science and Technology, and coauthors study the investment behavior of German investors in term deposits on a major fintech platform that allows users to place deposits with banks across Europe.
We uncover polarized beliefs about the credibility of deposit insurance using data from a large fintech company that offers “guaranteed” Euro term deposits from European banks. Choosing between countries, 11% of their German investors, "Believers," always choose the highest rate, whereas 67%, "Doubters", never do. Choosing within a country, most investors choose the highest rate. Doubters are older, have less trust in the European Central Bank, and live in the former East Germany. We explain these results with a model where Believers trust the deposit insurance of all countries, but Doubters invest only in countries whose deposit insurance they trust.
