The Role of Deposit Guarantee Schemes (DGSs) within the Crisis Management Framework

Abstract

The present study undertakes an overview of the role of deposit guarantee schemes (DGSs) within the banking crisis management framework. It is structured in four Section: Section 1 discusses the policy objectives of DGSs, namely the protection of depositors and the contribution to the stability of the banking system. Section 2 turns then to the functions (mandates) of DGSs, with a main focus on their institutional design as to the ‘payout (or paybox) function’ and their contribution in resolution financing. Section 3 is on DGSs’ role within the economic and the financial system, developing on their effectiveness as influenced not only by their design features but also by the environment within which they operate and predominantly by macroeconomic conditions and the strength of the sovereign and their institutional relationship with other ‘bank safety net’ components. Finally, the liability of states when establishing DGSs and the problems arising from the operation of DGSs, namely exposure to moral hazard and the differential treatment of banks deemed ‘too-big-to-fail’ (TBTF), are discussed in Section 4.