Deposit Insurance System Research Articles

Deposit Insurance: An Empirical Study of Private Investors' Knowledge and Perception

Theoretical studies about the interrelation of bank runs and deposit insurance assume that depositors are perfectly informed about deposit insurance and its main features. This assumption is commonly made, but was hardly ever checked empirically. Taking German depositors as an example, we investigate the knowledge about existing deposit insurance systems and how the insurance levels of different banks are perceived. By doing so, this study is one of the very few exceptions which address the public awareness of deposit insurance, and it may be the only one which examines how depositors perceive their deposits' security. Using survey data of 756 private investors, our results indicate a lack of knowledge about depositor protection but much confidence in it. Although practically all personal deposits of the banks in the survey are fully secured, private depositors perceive differences in the safety level across banks. These differences can be partly explained by the banks' reputations.

(Problems in Respect to Investor Protection in the Capital Market and Financial Investment Business Act and Possible Reformative Measures to the Deposit Insurance System)

(Problems in Respect to Investor Protection in the Capital Market and Financial Investment Business Act and Possible Reformative Measures to the Deposit Insurance System)

Market Discipline and Deposit Insurance in Russia

The paper presents a study of Russian banks' interest rates on household deposits during the formation period of the deposit insurance system. It is shown that market discipline weakened after deposit insurance was effectively in place.

A Deposit Insurance System for Armenia

We provide an overview of the design for a system of official deposit guarantees for the Republic of Armenia. This proposed design takes into consideration the overall structure of the Armenian economy, its official institutions and the financial system. Furthermore, we outline specific design features for the Armenian deposit insurance system that are consistent with the social welfare objectives that underpin arguments for its adoption, while minimizing the distortions of these government guarantees on incentives. Key among the design features are limited coverage of deposits, separation of deposit insurance from central banking, and extended liability of banks for losses incurred by the deposit insurance fund.

Safe and Sound Banking, 20 Years Later: What was Proposed and What has Been Adopted

In 1986, a task force of banking academics organized and sponsored by the American Bankers Association convened to examine the banking industry and the efficacy of its regulatory system. The group was charged with reviewing the problems of ensuring the safety and soundness of the banking system and evaluating a number of policy options to improve the efficiency, performance, and safety of the system by changing the structure of the deposit insurance system and the bank regulatory and supervisory process. The results of the work of the task force were published by the MIT Press as the book, Perspectives on Safe and Sound Banking (Benston et al., 1986, the Report), which includes a set of principal options and recommendations. The purpose of this article is to assess the extent to which changes in public policy regarding depository institutions have been aligned with the recommendations of the Report. We find that, over the past 20 years, several legislative initiatives and changes in regulations and the bank supervisory process have been in keeping with the specific recommendations of the Report or with the analytic framework underlying the recommendations. At the same time, other recommendations in the Report have not been taken up and some proposals rejected in the Report have been put in place by legislative and regulatory initiatives. Overall, public policy and private sector initiatives appear to have contributed to safer and sounder banking and thrift sectors over the past 20 years. Consistent with what we see as the main theme of the Report, a likely contributing factor is the more appropriate alignment of incentive for risk-taking among larger depository institutions. Developments affecting risk-taking by depository institutions likely include higher capitalizations, greater risk exposure of private sector stakeholders more generally, improvements in risk management, and supervision and regulation that is focused on overall risk.

Designing deposit insurance scheme under asymmetric information with double liability option

In this article, an option theoretic model is applied to develop a Deposit Insurance Scheme under asymmetric information environment. By introducing double liability as an option into the deposit insurance scheme, our model solves the Deposit Insurer's adverse selection problem. With appropriately designed deposit insurance premia and double liability obligations, we demonstrate that separating equilibria exist. The introduction of double liability into the current deposit insurance system adds additional cost to the system to make the insurance scheme more effective. Macey and Miller (1992) suggest that such double liability is a very useful tool for preventing the incentive problem typically created by current deposit insurance schemes. Based on Jackson (1993), Macey and Miller (1993) and Grossman (2002), no consensus exists to explain whether double liability can replace the current deposit insurance system. There are two companion issues that must be considered. The first is the preservation of the sa...

Editors' Overview

Editors' Overview

Deposit Insurance Reform in Belarus: Remedy or Threat for the Banking System?

The transformation of private savers' funds into business loans through the banking system is weak in Belarus compared with other Eastern European economies. High concentration, governmental interference, an inconsistent regulation, and a difficult business environment characterise the banks' situation. In order to attract more savings, a reform of the deposit insurance system is presently under discussion. This is expected to contribute to economic growth and development. But deposit insurance, especially when established in a weak institutional environment, can unfold multifarious moral-hazard effects. This paper analyses whether the proposed deposit insurance system is likely to improve the present situation and how it could be better adjusted to the country's situation.

Designing Countercyclical and Risk Based Aggregate Deposit Insurance Premia

This paper proposes an aggregate deposit insurance premium design that is risk-based in the sense that the premium structure ensures the deposit insurance system has a target of survival over the longer term. Such a premium system naturally exceeds the actuarily fair value and leads to a growth in the insurance fund over time. The proposed system builds in a swap in premia that reduces premia when fund size exceeds a threshold. In addition, we build in a swap contract that trades premia in good times for relief in bad times.

The Analysis of U.S. Deposit Insurance System and the Enlightenment to China

U.S. deposit insurance system has important and deep influence on the building and operating of the deposit insurance system for many countries in the world. Based on the analysis of the development stage and status quo of the U.S. deposit insurance system, this paper suggests that China should learn from the experience of U.S. deposit insurance system, to build and perfect the laws of deposit insurance system, and the mandatory, the scope, the insurance premium, and the top insurance amount of the deposit insurance system should be stated, and the deposit insurance agencies should maintain their independence and restrain the moral hazard. Only in that way can the deposit insurance system of China be built and perfected.

Deposit Insurance Altered the Composition of Bank Suspensions during the 1920s: Evidence from the Archives of the Board of Governors

Abstract Eight states established deposit insurance systems between 1908 and 1917. All abandoned the systems between 1921 and 1930. Scholars debate the costs and benefits of these policy experiments. New data drawn from the archives of the Federal Reserve Board of Governors demonstrate that deposit insurance influenced the composition of bank suspensions in these states. In typical years, suspensions due to runs fell. Suspensions due to mismanagement rose. During the penultimate year of each system, the bank failure rate rose to an unsustainable height and the system ceased operations.

Instituting a deposit insurance system: Why? How?

The number of countries either establishing or considering establishing a deposit insurance system has expanded rapidly in recent years. By 2005, 78 countries had instituted some form of an explicit deposit guarantee programme. In establishing a deposit insurance programme, each country must consider what it hopes to achieve and whether the system that is established is internally consistent with its goal(s). Circumstances unique to the country will have a significant bearing on what a deposit insurance system can achieve and how the system should be structured. This article discusses these issues and provides a series of questions designed to help evaluate the strengths and weaknesses of deposit insurance systems. Emphasis is placed on whether the design features are internally consistent and compatible with the goals of the deposit insurance system.

Measures to promote effective interrelationships among financial safety net participants

The principal objectives of a deposit insurance system are to contribute to the stability of a country's financial system and to protect less financially sophisticated depositors from the loss of their deposits when banks fail. In designing deposit insurance systems, policymakers should address the deposit insurer's relationships and coordination with other safety net participants. A need for close coordination and information sharing exists in any institutional setting. But when more than one organisation is responsible for the smooth functioning of the financial safety net, it could be said that ‘Good Fences Make Good Neighbors’ as the functions assigned to different organisations raise issues related to the allocation of powers and responsibilities, information sharing and the coordination mechanism. In this regard, the aim of this paper is to examine ways to promote more effective interrelationships among safety net participants that will contribute to financial stability.

Safe and Sound Banking, 20 Years Later: What Was Proposed and What Has Been Adopted

In 1986, a task force of banking academics organized and sponsored by the American Bankers Association convened to examine the banking industry and the efficacy of its regulatory system. The group was charged with reviewing the problems of ensuring the safety and soundness of the banking system and evaluating a number of policy options to improve the efficiency, performance, and safety of the system by changing the structure of the deposit insurance system and the bank regulatory and supervisory process. The results of the work of the task force were published by the MIT Press as the book, Perspectives on Safe and Sound Banking (Benston et al., 1986, the Report), which includes a set of principal options and recommendations. The purpose of this article is to assess the extent to which changes in public policy regarding depository institutions have been aligned with the recommendations of the Report. We find that, over the past 20 years, several legislative initiatives and changes in regulations and the bank supervisory process have been in keeping with the specific recommendations of the Report or with the analytic framework underlying the recommendations. At the same time, other recommendations in the Report have not been taken up and some proposals rejected in the Report have been put in place by legislative and regulatory initiatives. Overall, public policy and private sector initiatives appear to have contributed to safer and sounder banking and thrift sectors over the past 20 years. Consistent with what we see as the main theme of the Report, a likely contributing factor is the more appropriate alignment of incentive for risk-taking among larger depository institutions. Developments affecting risk-taking by depository institutions likely include higher capitalizations, greater risk exposure of private sector stakeholders more generally, improvements in risk management, and supervision and regulation that is focused on overall risk.

European Banking Integration: Don’t Put the Cart before the Horse

This paper reviews the progress in European banking integration over the last twenty years, and evaluates the current system of banking supervision and deposit insurance based on ‘home country’ control. The public policy implications to draw from the paper are threefold: First, after a relatively slow start, European banking integration is gaining momentum, in terms of cross‐border flows, market share of foreign banks in several domestic markets, and cross‐border M&As of significant size. If this trend continues, the issue of adequate supervision and safety nets in an integrated European banking market will become even more pressing. Second, although until recently banks have relied mostly on subsidiary structures to go cross‐border, this is changing with the recent creation of the European company statute, which facilitates cross‐border branch banking. A review of the case of the Scandinavian bank, Nordea Bank AB, helps to understand some remaining barriers to integration, and the supervisory issues raised by branch banking. Third, it is argued that the principle of ‘home country’ supervision is unlikely to be adequate in the future for large international banks. Because the closure of an international bank would be likely to have cross‐border spillovers, and because some small European countries might be unable to finance the bail‐out of their very large banks, centralization, or at least Europe‐wide coordination, of the decision to close or bail‐out international banks is needed. This raises the issue of European funding of bail‐out costs, European banking supervision, and European deposit insurance.

The transparency of the banking system and the efficiency of information-based bank runs

In this paper, we investigate the relationship between the transparency of banks and the fragility of the banking system. We show that information-based bank runs may be inefficient because the deposit contract designed to provide liquidity induces depositors to have excessive incentives to withdraw. An improvement in the transparency of a bank may reduce depositor welfare by increasing the chance of an inefficient contagious run on other banks. A deposit insurance system in which some depositors are fully insured and the others are partially insured can ameliorate this inefficiency. Under such a system, bank runs can serve as an efficient mechanism for disciplining banks. We also consider bank managers' control over the timing of information disclosure, and find that bank managers may use their influence to eliminate both inefficient and efficient bank runs.

Deposit Insurance Altered the Composition of Bank Suspensions during the 1920s: Evidence from the Archives of the Board of Governors

Eight states established deposit insurance systems between 1908 and 1917. All abandoned the systems between 1921 and 1930. Scholars debate the costs and benefits of these policy experiments. New data drawn from the archives of the Federal Reserve Board of Governors demonstrate that deposit insurance influenced the composition of bank suspensions in these states. In typical years, suspensions due to runs fell. Suspensions due to mismanagement rose. During the penultimate year of each system, the bank failure rate rose to an unsustainable height and the system ceased operations.

Comment on: “Deposit insurance, bank regulation and financial system risks”

Comment on: “Deposit insurance, bank regulation and financial system risks”

Deposit insurance, bank regulation, and financial system risks

Empirical evidence is presented to show that in modern times banks can hedge liquidity shocks but could not do so prior to FDIC insurance. However, the government's limitations in properly pricing FDIC insurance are leading to many current examples of moral hazard. A model is presented to show that if insurance premiums are set to be “actuarially fair,” incentives for banks to take excessive systematic risks remain. Motivated by empirical evidence that money market mutual funds also can hedge liquidity shocks, I consider an alternative government insurance system that mitigates distortions to risk-taking yet preserves liquidity hedging and information synergies.

Amakudari as a signal: possible malfunctioning of the amakudari practice under the limited deposit insurance system

We analyse the amakudari practice in Japan focussing on the banking industry where officials from the regulatory authority obtain post-retirement jobs in private banks. A theoretical model is developed to investigate a new role that amakudari might play following the introduction of limited deposit insurance in 2005. It is generally expected that changing deposit insurance from full to limited will discipline Japanese banks' risk-taking behaviour because depositors will start monitoring their banks. However, our game-theoretic analysis suggests the possibility that this disciplinary effect could be reversed by the new role that amakudari may play. We assume that depositors are unsure about banks' riskiness and infer their riskiness from observing whether or not they hire amakudari officials, i.e. these amakudari officials play a crucial role as a signal to depositors. This signal, however, might malfunction. We show that, in order to create more post-retirement employment opportunities for their officials, the regulatory authority may weaken prudential regulation. Ironically and unexpectedly, the introduction of limited deposit insurance may make the whole banking industry riskier.