Working Paper: NBER ID: w12862
Authors: Asli Demirgüç-Kunt; Edward J. Kane; Luc Laeven
Abstract: This paper identifies factors that influence decisions about a country's financial safety net, using a comprehensive dataset covering 180 countries during the 1960-2003 period. Our analysis focuses on how private interest-group pressures, outside influences, and political-institutional factors affect deposit-insurance adoption and design. Controlling for macroeconomic shocks, quality of bank regulations, and institutional development, we find that both private and public interests, as well as outside influences to emulate developed-country regulatory schemes, can explain the timing of adoption decisions and the rigor of loss-control arrangements. Controlling for other factors, political systems that facilitate intersectoral power sharing dispose a country toward design features that accommodate risk-shifting by banks.
Keywords: Deposit Insurance; Financial Safety Net; Political Economy
JEL Codes: G21; G28; P51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private and public interests + outside influences (D72) | timing of deposit insurance adoption (G28) |
| political systems that facilitate intersectoral power sharing (P26) | deposit insurance designs that allow for bank risk-shifting (G28) |
| higher proportion of undercapitalized banks (G21) | likelihood of adopting deposit insurance sooner (G28) |
| financial crises (G01) | likelihood of adopting deposit insurance (G28) |
| more democratic political environments (D72) | earlier adoption and less rigorous risk controls (G18) |
| external pressures from institutions (IMF, EU) (F33) | better risk controls in deposit insurance systems (G28) |