Banking Instability And Deposit Insurance In Low Income Countries

Abstract

hile deposit insurance aimed at minimising the risk of banking instability has been adopted in the regulatory structures of a large number of middle to high income countries and in only a few low income countries, most cases of banking instability have been recorded in the low income countries. Does the absence of deposit insurance explain the high prevalence of banking instability in low income countries relative to their high income counterparts? Or, are low income countries just prone to banking instability more than high income countries? This study sets out to answer these and other questions. Using an empirical framework that distinguishes bank runs and insolvency of banks as identifiers of banking instability, the study establishes that deposit insurance per se has no bearing on banking fragility. The study further finds very weak evidence that low income countries are vulnerable to banking instability more than high income countries.