We examine how the level deposit insurance coverage affects bank liquidity. We also test the role
of ownership in the relationship between deposit insurance coverage and bank liquidity. This study
uses quarterly data of Indonesian banks from Q1:2002 - Q2:2008. We argue that the presence of explicit
deposit insurance changes a bank‘s behavior in liquidity management in the form of decreasing
asset liquidity. We find some evidence on the negative impact of deposit insurance coverage on bank
liquidity. However, little is found on the role of ownership structure. The credibility of deposit insurance
system and implicit guarantee are the main policy implications.
