Financial innovation and moral hazard: the case of time deposits with special guarantee

The macroprudential policy mechanism of Time Deposits with Special Guarantee (TDSG) was introduced in Brazil after the 2008 global financial crisis to prevent a liquidity shock in the banking sector. The TDSG is a form of deposit insurance established to avoid bank runs and protect depositors in the event of bankruptcy of financial institutions. In this paper, we study the impact of the TDSG policy on the moral hazard of small and medium-sized Brazilian banks based on data from 101 banks in the period 2007 to 2015. The empirical evaluation relies on difference-in-differences estimators with fixed effects. The results provide evidence validating the hypothesis of moral hazard associated with the TDSG policy.