Abstract
This study analyzes the effect of an explicit deposit insurance scheme (EDIS) on the probability of a banking crisis in a country while taking the country’s overall economic development into account. The panel data for the period of 1980–2003 include all the countries having the data on an EDIS. The major finding is that if the interaction between a country’s overall economic development and its use of an EDIS is not controlled for, the country’s use of the EDIS increases the probability of a banking crisis. This increase is greater the more inefficiently designed the EDIS is. However, once the interaction between the overall economic development and the use of the EDIS is controlled for, it is found that the EDIS itself is not a significant factor of a banking crisis. In that case, the less developed the country is that is using an EDIS, the higher the probability of a banking crisis.
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