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.

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

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.