Working Paper: NBER ID: w8493
Authors: Edward J. Kane; Asli Demirgüç-Kunt
Abstract: 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.
Keywords: Deposit Insurance; Banking Stability; Financial Development; Crisis Resolution
JEL Codes: G2; F3; K2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deposit insurance (G28) | bank risk-taking (G21) |
| weak institutional frameworks (O17) | adverse consequences of deposit insurance (G28) |
| deposit insurance design features (G28) | banking stability (F65) |
| deposit insurance design features (G28) | market discipline (G18) |
| deposit insurance design features (G28) | crisis resolution effectiveness (H12) |