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  • Edda Zoli
  • Danyang Xie
  • Reza Vaez-Zadeh

Abstract

This paper argues that an optimal deposit insurance scheme would allow the level of insurance coverage to be determined by the market. Based on this principle, the paper proposes an insurance scheme that minimizes distortions and embodies fairness and credibility, two essential characteristics of a viable and effective deposit insurance scheme. Using a simple model for the determination of the optimal level of insurance coverage, it is shown that the optimal coverage is higher for developing compared to developed countries; a condition that is broadly satisfied by prevailing deposit insurance practices around the world.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/207.

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Length: 33
Date of creation: 01 Dec 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/207

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Related research

Keywords: Deposit insurance; banking; moral hazard; subordinated debt; bank runs; insurance coverage; deposit insurance scheme; bank run; bank failures; insurance system; insurance premium; capital requirements; banking system; risk taking; bank risk; banking crises; deposit guarantee; federal bank capital; capital regulation; insurance limits; deposit insurance coverage; deposit insurance premium; capital requirement; risk aversion; capital adequacy; bank failure; prudential regulation; insurance contributions; bankers; narrow banking; banks ? assets; bank capital regulation; bank risk-taking; bank holding companies; market forces; bank regulators; bank holding; banking sector; banking system stability; bank regulation; banking activities; banking supervisory agency; bank incentive; price risk; bank clients; retail banking; banking supervision; risk profile; economic condition; settlement system; banking regulation; bank rates; insurance systems; bank investment; coinsurance; supplementary capital; banking institutions; bank losses; insurance premiums; bank soundness; bank portfolio; accounting rules; bank creditors; banks with assets; banker; banking panic; bank behavior; bankers association; insured deposit; bank insolvency risk; bank deposit; beneficiaries; capital base; deposit insurance systems; banks ? balance sheets; depositor protection; banks ? balance sheet; risk evaluation; government insurance; credit union; bank assets; bank solvency; present value; bank insolvency; bank loans; bank capital regulations; bank managers; financial systems;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Asli Demirgüç-Kunt & Enrica Detragiache, 1997. "The Determinants of Banking Crises," IMF Working Papers 97/106, International Monetary Fund.
  2. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-33, December.
  3. Arthur J. Rolnick, 1987. "The benefits of bank deposit rate ceilings: new evidence on bank rates and risk in the 1920's," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-18.
  4. Maria Soledad Martinez Peria, 2001. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Journal of Finance, American Finance Association, vol. 56(3), pages 1029-1051, 06.
  5. Park, Sangkyun & Peristiani, Stavros, 1998. "Market Discipline by Thrift Depositors," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 347-64, August.
  6. anonymous, 1999. "Using subordinated debt as an instrument of market discipline," Staff Studies 172, Board of Governors of the Federal Reserve System (U.S.).
  7. Gennotte, Gerard & Pyle, David, 1991. "Capital controls and bank risk," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 805-824, September.
  8. Christian Kerfriden & Jean-Charles Rochet, 1993. "Actuarial Pricing of Deposit Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 18(2), pages 111-130, December.
  9. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-38, July.
  10. Frederick T. Furlong & Michael C. Keeley, 1987. "Bank capital regulation and asset risk," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-40.
  11. Dewatripont, Mathias & Tirole, Jean, 1992. "Efficient Governance Structure : Implications for Banking Regulation," IDEI Working Papers 18, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Acharya, Sankarshan & Dreyfus, Jean-Francois, 1989. " Optimal Bank Reorganization Policies and the Pricing of Federal Deposit Insurance," Journal of Finance, American Finance Association, vol. 44(5), pages 1313-33, December.
  13. James, Christopher, 1990. "Heterogeneous creditors and the market value of bank LDC loan portfolios," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 325-346, June.
  14. Park, Sangkyun, 1995. "Market discipline by depositors: Evidence from reduced-form equations," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(35), pages 497-514.
  15. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
  16. R. Alton Gilbert, 1990. "Market discipline of bank risk: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-18.
  17. G. G. Garcia, 1999. "Deposit Insurance," IMF Working Papers 99/54, International Monetary Fund.
  18. Gropp, R. & Vesala, J., 2001. "Deposit Insurance and Moral Hazard: Does the Counterfactual Matter?," Papers 47, Quebec a Montreal - Recherche en gestion.
  19. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October.
  20. Cordella, Tito & Levy Yeyati, Eduardo, 1998. "Financial Opening, Deposit Insurance and Risk in a Model of Banking Competition," CEPR Discussion Papers 1939, C.E.P.R. Discussion Papers.
  21. Karels, Gordon V. & McClatchey, Christine A., 1999. "Deposit insurance and risk-taking behavior in the credit union industry," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 105-134, January.
  22. Urs Birchler & Andréa M. Maechler, 2001. "Do Depositors Discipline Swiss Banks?," Working Papers 01.06, Swiss National Bank, Study Center Gerzensee.
  23. Timothy H. Hannan & Gerald A. Hanweck, 1986. "Bank insolvency risk and the market for large certificates of deposit," Working Papers in Banking, Finance and Microeconomics 86-1, Board of Governors of the Federal Reserve System (U.S.).
  24. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  25. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  26. Goldberg, Lawrence G. & Hudgins, Sylvia C., 1996. "Response of uninsured depositors to impending S&L failures: Evidence of depositor discipline," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(3), pages 311-325.
  27. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
  28. Roberto Steiner & Adolfo Barajas, 2000. "Depositor Behavior and Market Discipline in Colombia," IMF Working Papers 00/214, International Monetary Fund.
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Cited by:
  1. Garcia, G.G.H. & Prast, H.M., 2004. "Depositor and investor protection in the Netherlands: Past, present and future," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4296147, Tilburg University.

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