How Did the Introduction of Deposit Insurance Affect Chinese Banks? An Investigation of Its Wealth Effects

The latest introduction of deposit insurance in China gives us a chance to explore the stock market reaction to the major regulatory policy change in banking. Our results show the average abnormal returns of all listed banks in China are significantly negative on the announcement day. It indicates the introduction of deposit insurance has an adverse wealth effect on the banking industry in China. We also find that among bank characteristics such as asset size, z-score, and ROE, only size has a statistically significant positive impact on the abnormal returns of the Chinese listed banks on the announcement day. The results mean the introduction of deposit insurance in China creates a redistribution of wealth from small banks to those with larger size.