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Deposit insurance as private club: is Germany a model?

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  • Beck, Thorsten

Abstract

The author describes, and evaluates the deposit insurance scheme set-up by private commercial banks in Germany in 1975. The scheme's funding, and management are completely private, with no pubic supervision. Where other schemes rely on monitoring by depositors to decrease moral hazard problems, the German scheme relies on peer monitoring by its member banks. The system has weathered several small bank crises, but has not yet been exposed to a major bank failure, or a systemic crisis. To what extent can it serve as a model for other countries? The success of the German scheme hasto be judged against an institutional environment that fosters contract enforcement, and the rule of law, and discourages corruption. In a country with weaker institutions, the voluntary membership might quickly lead to adverse selection, with strong banks leaving the scheme. The high coverage limit might induce bank managers, and owners to abuse the scheme. Banks might intentionally under-fund the scheme, counting on additional government resources in times of crisis. And the secrecy of funds might decrease fund managers'accountability in societies with little transparency, and much corruption. In Germany's highly concentrated commercial banking sector, the small number of banks facilitates a club atmosphere, and quick resolution of banking crises. But it could also prevent the entry of new, innovative market participants, so that the club becomes a cartel. Germany's anti-bankruptcy bias might help prevent moral hazard, but can also stifle entrepreneurship. There is a tradeoff between the efficiency gain of a privately run deposit insurance scheme, and its potentially negative impact on competition, and entrepreneurship. Although the scheme cannot easily be transplanted to developing countries, it offers lessons for other economies. Schemes with a club-like character, reinforce peer monitoring, and minimize the risk of free riding. Risk-based premiums, based on auditing by the deposit insura

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Bibliographic Info

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 42 (2002)
Issue (Month): 4 ()
Pages: 701-719

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Handle: RePEc:eee:quaeco:v:42:y:2002:i:4:p:701-719

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Web page: http://www.elsevier.com/locate/inca/620167

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References

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  1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2001. "Government Ownership of Banks," Working Paper Series rwp01-016, Harvard University, John F. Kennedy School of Government.
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  9. Gorton, Gary & Schmid, Frank A., 2000. "Universal banking and the performance of German firms," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 29-80.
  10. Charles W. Calomiris, 1989. "Deposit insurance: lessons from the record," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 10-30.
  11. English, William B., 1993. "The decline of private deposit insurance in the United States," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 57-128, June.
  12. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 283-295, June.
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  14. Luc Laeven, 2002. "Bank Risk and Deposit Insurance," World Bank Economic Review, World Bank Group, vol. 16(1), pages 109-137, June.
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Citations

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Cited by:
  1. Ting-Fang Chiang & E-Ching Wu & Min-Teh Yu, 2007. "Premium setting and bank behavior in a voluntary deposit insurance scheme," Review of Quantitative Finance and Accounting, Springer, vol. 29(2), pages 205-222, August.
  2. Beck, Thorsten & Laeven, Luc, 2006. "Resolution of failed banks by deposit insurers : cross-country evidence," Policy Research Working Paper Series 3920, The World Bank.
  3. Gorton, Gary & Huang, Lixin, 2006. "Bank panics and the endogeneity of central banking," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1613-1629, October.
  4. Ralf Bebenroth & Diemo Dietrich & Uwe Vollmer, 2009. "Bank regulation and supervision in bank-dominated financial systems: a comparison between Japan and Germany," European Journal of Law and Economics, Springer, vol. 27(2), pages 177-209, April.
  5. Aidan Walsh, 2011. "Learning from pondlife and fishermen: towards a modular financial services industry," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 19(4), pages 312-322, November.
  6. Beck, Thorsten, 2003. "The incentive-compatible design of deposit insurance and bank failure resolution : concepts and country studies," Policy Research Working Paper Series 3043, The World Bank.
  7. Goedde-Menke, Michael & Langer, Thomas & Pfingsten, Andreas, 2014. "Impact of the financial crisis on bank run risk – Danger of the days after," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 522-533.

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