Explicit Deposit Research Articles

Does Deposit Insurance Increase Banking System Stability?

This study analyzes panel data for 61 countries during 1980-97 and concludes that explicit deposit insurance tends to be detrimental to bank stability, the more so where bank interest rates are deregulated and the institutional environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger when the coverage offered to depositors is extensive, when the scheme is funded, and when it is run by the government rather than by the private sector.

Japan's Experience with Deposit Insurance and Failing Banks: Implications for Financial Regulatory Design?

This paper examines three decades of Japanese experience with deposit insurance and failing banks, and analyzes the implications of that experience for bank safety net reform in other countries. To date, the literature and policy debate on deposit insurance have been heavily colored by U.S. banking history and focus almost exclusively on explicit deposit protection schemes. Analysis of Japan's safety net experience suggests that (a) deposit insurance, for all its flaws, is superior to the real-world alternative -- implicit government protection of depositors and discretionary regulatory intervention in bank distress, (b) a well designed explicit deposit insurance system which includes a credible bank closure policy is the starting point for the design of effective private alternatives to a government-run safety net, and (c) the trend toward greater institutionalization of the Japanese safety net -- culminating in recent legislation to address the financial crisis -- reflects increased political competition and greater emphasis on legal as opposed to reputational systems of economic ordering in that country.

Are All Banking Crises Alike? The Japanese Experience in International Comparison

This paper examines episodes of banking sector distress for a large sample of developed and developing countries, highlighting the experience of Japan. We estimate a multivariate probit model that links the likelihood of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s. The likelihood of an episode of banking distress rose in line with the sharp drop in asset prices, deepening recession and a “moral hazard” problem (financial liberalization combined with explicit deposit insurance). J. Japan. Int. Econ., September 1999, 13(3), pp. 155–180. Department of Economics, Social Sciences 1, University of California, Santa Cruz, California 95064 Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: E44, G21, O16.

Determinants, Costs, and Duration of Banking Sector Distress: The Japanese Experience in International Comparison

This paper examines episodes of banking sector distress for a large sample of countries, highlighting the experience of Japan. We estimate a model that links the onset of banking problems to a set of macroeconomic variables and institutional characteristics. The model predicts a high probability of banking sector distress in Japan in the early 1990s, matching actual developments closely, and suggests that the Japanese episode fits a well-established pattern characterizing banking sector problems elsewhere. An empirical model explaining the output cost of banking sector distress is also investigated. The results indicate that output loss is smaller the more quickly banking sector problems are resolved and when exchange rate stability is maintained. Explicit deposit insurance also appears to lessen the output cost of banking sector distress. The real output loss to Japan of not resolving banking sector problems is estimated at almost one percent of GDP annually.

The Determinants of Banking Crises in Developing and Developed Countries

The paper studies the factors associated with the emergence of systemic banking crises in a large sample of developed and developing countries in 1980-94 using a multivariate logit econometric model. The results suggest that crises tend to erupt when the macroeconomic environment is weak, particularly when growth is low and inflation is high. Also, high real interest rates are clearly associated with systemic banking sector problems, and there is some evidence that vulnerability to balance of payments crises has played a role. Countries with an explicit deposit insurance scheme were particularly at risk, as were countries with weak law enforcement.

The Determinants of Banking Crises: Evidence from Developing and Developed Countries

The paper studies the factors associated with the emergence of systemic banking crises in a large sample of developed and developing countries in 1980-94, using a multivariate logit econometric model. The results suggest that crises tend to erupt when the macroeconomic environment is weak, particularly when growth is low and inflation is high. Also, high real interest rates are clearly associated with systemic banking sector problems, and there is some evidence that vulnerability to balance of payments crises has played a role. Countries with an explicit deposit insurance scheme were particularly at risk, as were countries with weak law enforcement.

The Determinants of Banking Crises: Evidence From Developing and Developed Countries

The paper studies the factors associated with the emergence of systemic banking crises in a large sample of developed and developing countries in 1980–94, using a multivariate logit econometric model. The results suggest that crises tend to erupt when the macroeconomic environment is weak, particularly when growth is low and inflation is high. Also, high real interest rates are clearly associated with systemic banking sector problems, and there is some evidence that vulnerability to balance of payments crises has played a role. Countries with an explicit deposit insurance scheme were particularly at risk, as were countries with weak law enforcement.

Is deposit insurance inevitable? Lessons from Argentina

This paper explores the decision by the Argentine government to abolish deposit insurance, and its subsequent decision to re-establish a form of deposit insurance. Before 1991, the Argentine banking system operated under a regime of optional, explicit deposit insurance, coupled with extensive implicit deposit insurance in the form of central bank assistance to failing banks. In 1991 and 1992, Argentina reversed this policy by repealing the country's deposit insurance program and attempting to convince financial markets that it would not under any circumstances rescue a failing bank. In 1995, in the face of a forthcoming election and a severe economic crisis sparked by the Mexicon peso devaluation of December 1994, the Argentine government reinstituted a form of deposit insurance in an effort to stave off an all out bank panic. The decision to re-establish deposit insurance appears inconsistent with repeated assurances from high-level officials that the Argentine government would not under any circumstances bail out depositors in a failing bank. These events are of interest to U.S. deposit insurance reform because they allow the investigation of a real-world case in which a significant economic system repealed its program of deposit insurance. It is often said in the United States that cutbacks in the deposit insurance guarantee are politically impossible. Yet such reforms were implemented in Argentina. How those reforms came to pass is a question of some interest for the analysis of U.S. deposit insurance reform. At the same time, the government's subsequent retreat from its commitment to allow troubled banks to fail, without protecting depositors, counsels caution about the efficacy of attempts to eliminate deposit insurance. Argentina's deposit insurance reform could not withstand the political and economic pressures attending a severe crisis that threatened the viability of the overall package of economic change. To what extent can any country reliably commit not to protect bank depositors, given the possibility of a banking crisis and the extraordinary political pressures that attend it? While fundamental reform of deposit insurance does appear possible, the experience in Argentina suggests caution about the durability of such reforms, especially in economic systems characterized by historical instability in banking markets.

SHOULD THE FUNCTIONS OF MONETARY POLICY AND BANKING SUPERVISION BE SEPARATED?

THIS PAPER considers whether monetary policy and banking supervision should be separated. Separation is a current policy issue in the context of the proposed functions of the prospective European Central Bank (ECB). The statute of the ECB (Council of the European Communities 1992) empowers the ECB to conduct EU-wide monetary policy, but leaves the responsibility for banking supervision with the national authorities. The ECB thus seems to follow the German model of separating the two functions rather than the UK model of combining them. To address the separation issue we begin by examining empirically which regime (combined or separated) is less prone to bank failures. However, the regime with the minimum number of banking problems is not necessarily the most efficient in welfare terms. If a low frequency of bank failures was, for example, the result of a tight regulatory and supervisory system, then it is not clear whether a reduction of costly bank rescues would outweigh the potential benefits of a less strict regulatory system. We therefore go on to analyse which regime tends to generate a more efficient resolution of such bank failures while, at the same time, avoiding possible systemic consequences. In particular, we look at the methods of handling a failing bank and the sources of funding used under each regime. Are these methods and funding sources roughly the same for each regime, or are there significant differences in the process of resolving bank failures? Finally, we examine whether bank rescues are financed on an implicit central bank/commercial banks basis, or on an explicit deposit insurance/government basis. So long as rescues and insurance are primarily undertaken by the central bank in conjunction with the commercial banks, then the central bank would also naturally want to undertake supervision. There have, however, been some signs of a trend towards using tax-payers' money for bank rescues which strengthens the case for separation of the two functions and establishment of a government agency for the supervisory function. The paper is organised as follows. In Section 2, we start with a brief account of the historical evolution of the central bank's micro-function (banking supervision) and its involvement in organising bank rescues. In this context, we discuss the role of the lender of last resort and the inroduction of deposit insurance. There is currently a diversity of institutional arrangements, but the

The Fiscal Abuse of Central Banks

This paper reviews the fiscal activities that governments in a sample of 26 developing countries have obliged their central banks to undertake. In the main, these activities fall under five categories: (1) collecting seigniorage; (2) imposing financial restriction; (3) implementing selective credit policies; (4) undertaking foreign exchange operations at nonmarket-clearing prices; and (5) providing implicit or explicit deposit insurance at subsidized rates and recapitalizing insolvent financial institutions. Not all central banks engage in all these activities, but some central banks perform additional fiscal activities such as collecting taxes and running food procurement programs.

The Fiscal Abuse of Central Banks

This paper reviews the fiscal activities that governments in a sample of 26 developing countries have obliged their central banks to undertake. In the main, these activities fall under five categories: (1) collecting seigniorage; (2) imposing financial restriction; (3) implementing selective credit policies; (4) undertaking foreign exchange operations at nonmarket-clearing prices; and (5) providing implicit or explicit deposit insurance at subsidized rates and recapitalizing insolvent financial institutions. Not all central banks engage in all these activities, but some central banks perform additional fiscal activities such as collecting taxes and running food procurement programs.

BANK FAILURE AND CONTAGION EFFECTS: EVIDENCE FROM HONG KONG

AbstractIn this paper the influence of three Hong Kong bank failures on stock prices of the colony's banking industry is examined. As deposit insurance is nonexistent in Hong Kong, the world's fourth‐largest financial center, an interesting environment is provided for testing contagion effects of bank failure on other healthy financial institutions. By examining contagion effects in an environment void of explicit deposit insurance, this study should provide interesting insights into the resiliency of modern‐day financial markets. In turn, insights should also be provided into debates concerning the role and reform of deposit insurance and the rationale for regulation of the financial services industry in general. The results indicate that unexpected bank failure causes significant negative stock price reactions within the banking industry; yet, some banks are less affected than others.

Deposit market deregulation, implicit deposit rates, and monetary policy

Previous analyses of the economic effects of deposit market deregulation generally have treated the gradual elimination of deposit rate ceilings and the effective removal of barriers to bank competition for deposits as separate issues. The key implication of the analysis utilized in this paper is that there are important interactions between these two forms of deposit market deregulation and their ultimate effects on market behavior and outcomes. One aspect of this interaction concerns the payment of implicit interest on deposit balances. Although implicit interest payments usually are viewed as a response to the imposition of ceilings on explicit deposit rates, the amount of implicit interest paid by banks in fact depends crucially upon the amount of monopoly power available to banks as a result of entry restrictions. Competition in deposit markets drives the implicit interest rate to 0 even if the explicit deposit rate is regulated, and the existence of imperfect competition in deposit markets makes the payment of positive implicit deposit interest a theoretical possibility even if the explicit deposit rate ceiling is removed.

Taxation of Interest Income, Deregulation and the Banking Industry

ABSTRACTRemoving interest rate ceilings on bank deposits or reducing the tax rate applicable to the interest earned on such deposits are alternative means of increasing the after‐tax return to depositors. These alternatives, however, have differing impacts on the structure of a competitive banking industry. This paper develops a model which focuses on a bank's choice between paying an explicit interest rate on its deposits and paying a return in the form of services. The model allows banks to differ in their production technologies and depositors in their marginal tax rates and preferences for services. The effects of tax rate changes and a ceiling on the explicit deposit interest rate are analyzed.

Deposit Ceilings and the Efficiency of Financial Intermediation

CONCERN FOR THE SOCIAL objective of an efficient financial system led several researchers to study economies of scale in financial intermediation during the 1960s.' These studies were used to draw inferences regarding the optimal structure of financial institutions.2 Today, there is added reason to be concerned with the costs of providing financial intermediary services. In 1966, the Interest Rate Control Act3 extended deposit rate ceilings to savings and loan associations and other thrift institutions much as the Banking Act of 1933 had previously authorized these controls over deposit rates of banks. This imposition of deposit rate ceilings has created incentives for savings associations to attract deposits by inducements in addition to the payment of explicit deposit rates. In a depositrate-constrained savings deposit market,4 the competitive mechanism is exercised through the provision of financial and nonfinancial goods and services to depositors in order to increase deposit holdings. These goods and services take a great variety of forms but to the financial intermediary result in added expenditures for labor, capital equipment or intermediate product.5 Nonrate competition-the financial analogue to nonprice competition-has become an important equilibrating adjustment mechanism in the rate-controlled savings deposit market.6