Deposit Insurance around the World: Issues of Design and by Aslı Demirgüç-Kunt, Edward J. Kane, Luc Laeven

By Aslı Demirgüç-Kunt, Edward J. Kane, Luc Laeven

Drawing on an unique cross-country dataset on deposit assurance platforms, an evaluation of the impression of deposit coverage on banking results and the coverage implications for constructing nations.

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It supplements them with formal obligations that contractually link the capitalization of a country’s private banks to the credit and tax-collecting capacity of their chartering government. The 1990s saw a rapid spread of explicit deposit insurance schemes (EDIS) in the developing world. In January 1995 only forty-nine countries had an EDIS. However, by year-end 2003, this number had surged to eighty-seven countries, an increase of almost 80 percent. Although a significant share of the surge can be attributed to transition countries of Eastern Europe that were ‘‘encouraged’’ to adopt deposit insurance by the EU directive on deposit insurance (European Commission 1994), recent adopters can be found in all continents of the world.

Before 1979, deposits in Argentina were unconditionally guaranteed by the Argentinean government. In 1979, a deposit insurance scheme was installed by the military government. The scheme provided full coverage for an accountholder’s first million pesos (about $640) and 90 percent coinsurance thereafter. In 1991, this 22 Aslı Demirgu¨c¸-Kunt, Edward Kane, and Luc Laeven scheme was abolished and replaced by a system that intensified the supervision of Argentine banks. However, after supervisors suspended the operations of five private banks in April 1995, deposit insurance was reintroduced.

He describes several methods for pricing deposit insurance accurately but his results suggest that many of these countries cannot afford deposit insurance. The sixth and final principle is that deposit insurers must actively involve themselves in decisions about when and how to resolve individual bank insolvencies. Because deposit insurers are responsible for paying off insured depositors, they have a strong interest in assuring the prompt and speedy resolution of insolvent banks. Beck and Laeven (chapter 4) argue that deposit insurers are more efficient than courts because banking supervisors better understand bank risk-taking incentives and how to remedy them.

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