Explicit deposit insurance has been spreading rapidly in recent years, even to countries with low levels of financial and institutional development. Economic theory indicates that deposit- insurance design features interact--for good or ill--with country-specific elements of the financial and governmental contracting environment. This paper documents the extent of cross-country differences in deposit- insurance design and reviews empirical evidence on how particular design features affect private market discipline, banking stability, financial development, and the effectiveness of crisis resolution. This evidence challenges the wisdom of encouraging countries to adopt explicit deposit insurance without first stopping to assess and remedy weaknesses in their informational and supervisory environments. We would like to thank Thorsten Beck, Jerry Caprio, Stijn Claessens, Ross Levine and Rick Mishkin for valuable discussions. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. 1.

this paper deals with the impact of deposit insurance programs on financial stability and financial development. The stability question is complementary to existing papers, particularly a recent study by DemirgucKunt and Detragiache (DD,2000). Based on evidence for 61 countries between 1980 and 1997, DD find that variations in coverage, funding or management of deposit insurance schemes are significant determinants of the likelihood of banking crisis, especially across countries where interest rates have been deregulated and the overall institutional framework is weak. We focus on the impact of deposit insurance on financial stability and development in a longer horizon before the financial or banking system collapses into a crisis. Accordingly, our empirics are not based on crisis data. Thus, our aim is to understand the impact of alternative deposit insurance design features over a longer horizon. We focus on financial development, broadly defined to include the level of financial activity, the stability of the banking sector, and the quality of resource allocation as reflected in real sector performance (i.e., growth). The empirical construct is guided by recent theories of banking regulation that employ an agency framework. In short, we focus on the steady-state, forward looking effects of deposit insurance. Recent events have shown that in times of crises, no matter whether deposit insurance is explicit or explicit, depositors tend to be bailed out anyway when systemic problems arise. Ex ante bail-out expectations, however, do influence bank risk-taking behavior even in stable circumstances, by truncating the negative tail of the distribution of expected returns, and our empirical tests are designed to measure these effects. Moreover, our paper extends the empirica...

This paper describes and evaluates the deposit insurance scheme set up by private commercial banks in Germany in 1975. Unlike schemes in other countries, its funding and management is completely private, without any public supervision. While other schemes rely on monitoring by depositors to decrease moral hazard problems, the German scheme relies on peer monitoring by its member banks. This paper evaluates the German deposit insurance scheme on the background of its unique characteristics, a very concentrated private banking market, a strong institutional environment and an antibankruptcy bias in Germany, and determines to which extent it can serve as a model for other countries. *World Bank, TBeck@worldbank.org, tel.: (202) 473-3215. I would like to thank Benno Wink and Karl-Heinz Hillen from the German Bundesbank, Joergen Bang from the German Bank Association, and Charles Calomiris, Gerard Caprio, Asl Demirg-Kunt, Udo Franke, Ed Kane, Dirk Kiesewetter, Daniela Klingebiel, Luc Laeven, Winfried Liedtke, Geoffrey Miller, Haluk Unal and participants at the Deposit Insurance Conference at the World Bank for helpful comments, without implicating them. This papers findings, interpretations, and conclusions are entirely those of the author and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. 1.

This paper describes and implements for UK banks a simple top-down approachto analyzing capital adequacy. Under di erent assumptions, we calculate default probabilities and implicit deposit insurance values using credit risk models based on the behavior of the banks ' equity-liability ratio. Furthermore, we investigate how probabilities of default and of nancial crisis (de ned as the simultaneous deterioration in several banks ' nances) change as bank capital levels are adjusted.

This paper analyzes the experience of the United States postal savings system, and (in less detail) that of Japan, with a view to assessing the past and potential future role of postal savings in Japan. The immense size of Japan’s postal savings system – accounting for one-third of household savings deposits and comprising the largest “bank ” in the world – means that the question of their disposition is central to any discussion of the future of Japan’s financial system as a whole. This study found that demand for postal savings deposits is explained, in both countries, mainly by two variables: price (interestdifferentials) and confidence in private banks. Geographical accessibility in rural areas is of less, and diminishing, importance. It is argued that postal banking should be viewed as an alternative to publicly sponsored deposit insurance, as a means to assure households’ access to safe and convenient savings and payment services. This implies that reform discussion should focus on the possibility of restructuring postal savings as a “narrow bank”, in such as way as to ensure that services are priced to fully reflect costs and risks incurred.

Financial interlinkage, in the form of cross-holding of equity and debt between �rms, characterizes business groups in many countries. We suggest that such �nancial interlinkage can be viewed as a way to solve credit rationing caused by asymmetric information. If �rms possess better information about each other than a bank, then business groups can be a mechanism to induce �rms to sort on the basis of this information. Banks can offer a menu of contracts that vary in the extent of �nancial interlinkage to induce �rms to self-select on the basis of the equilibrium composition of the business groups they can form. 1.

Abstract: Deposit insurance schemes and bank failure resolution systems are asked to fulfill conflicting public policy objectives: on the one hand, they are supposed to protect small depositors and prevent contagion risks from bank runs; on the other hand, they are supposed to minimize aggressive risk taking by banks. This paper discusses the incentive-compatible design and interaction of both components of the financial safety net and describes and compares three countries with different safety

This paper examines the role of uninsured deposits as a source of thrift funding from 1984 to 1994, and tests whether uninsured depositors have adjusted their holdings at thrifts in response to market forces, such as indications of impending institutional failure. It also examines how the reactions have changed over time as new legislation has been implemented. The study finds that failed institutions exhibit declining proportions of uninsured deposits-to-total-deposits prior to failure and that failing institutions attract fewer deposits from uninsured depositors prior to failure than do solvent institutions. Though there are some differences between the periods, the empirical results indicate that uninsured deposits will be governed by market discipline and that reducing the insurance limits on deposits will increase market discipline on thrifts.

The apparent banking market failure modeled by Diamond and Dybvig [1983] rests on their inconsistently applying their “sequential servicing constraint” to private banks but not to their government deposit insurance agency. Without this inconsistency, banks can provide optimal risk-sharing without tax-based deposit insurance, even when the number of “type 1” agents is stochastic, by employing a “contingent bonus contract.” The threat of disintermediation noted by Jacklin [1987] in the nonstochastic case is still present but can be blocked by contractual trading restrictions. This article complements Wallace [1988], who considers an alternative resolution of this inconsistency.

Deposit insurance schemes and bank failure resolution systems are asked to fulfill conflicting public policy objectives: on the one hand, they are supposed to protect small depositors and prevent contagion risks from bank runs; on the other hand, they are supposed to minimize aggressive risk taking by banks. This paper discusses the incentive-compatible design and interaction of both components of the financial safety net and describes and compares three countries with different safety net arrangements: Germany, Brazil and Russia.