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Deposit insurance in developing countries

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  • Talley, Samuel H.
  • Mas, Ignacio
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    Abstract

    About a dozen developing countries have deposit insurance systems and several others are considering establishing them. These systems are typically created to prevent contagious bank runs, to provide a formal national mechanism for handling failing banks, and to protect small depositors from losses when banks fail. Without a deposit insurance system, many developing nations in recent years have extended implicit deposit protection to depositors on a discretionary, ad hoc basis. Deposit insurance systems have several advantages over these implicit protection schemes. Deposit insurance probably gives the banking system more protection against bank runs, provides more protection for small depositors, and provides a faster, smoother administrative process. On the other hand, deposit insurance probably creates more moral hazard for depositors, thereby contributing to the erosion of market discipline and increased bank risk-taking. Deposit insurance also tends to be a more expensive mechanism for protecting depositors because it offers less freedom of action to policymakers than an implicit scheme. Finally, developing countries often do not adequately fund their deposit insurance schemes. As a result, the systems often lack credibility in the marketplace and bank supervisors may be unable to close insolvent banks because the insurer would be unable to pay off insured depositors.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 548.

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    Date of creation: 30 Nov 1990
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    Handle: RePEc:wbk:wbrwps:548

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    Related research

    Keywords: Banks&Banking Reform; Financial Crisis Management&Restructuring; Insurance&Risk Mitigation; Financial Intermediation; Insurance Law;

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    Cited by:
    1. Gallardo, Joselito & Ouattara, Korotoumou & Randhawa, Bikki & Steel, William F., 2005. "Comparative review of microfinance regulatory framework issues in Benin, Ghana, and Tanzania," Policy Research Working Paper Series 3585, The World Bank.
    2. Edward Kane, 2001. "Financial safety nets: reconstructing and modelling a policymaking metaphor," The Journal of International Trade & Economic Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(3), pages 237-273.
    3. Demirgüç-Kunt, Asli & Kane, Edward J. & Laeven, Luc, 2008. "Determinants of deposit-insurance adoption and design," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 17(3), pages 407-438, July.
    4. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
    5. Ngalawa, Harold & Tchana Tchana, Fulbert & Viegi, Nicola, 2011. "Banking Instability and Deposit Insurance: The Role of Moral Hazard," MPRA Paper 31329, University Library of Munich, Germany.
    6. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1751, Econometric Society.
    7. Lee, Wai Sing & Kwok, Chuck C. Y., 2000. "Domestic and international practice of deposit insurance: a survey," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 10(1), pages 29-62, January.
    8. Kane, Edward J. & DEC, 1994. "Difficulties of transferring risk-based capital requirements to developing countries," Policy Research Working Paper Series 1244, The World Bank.
    9. Hermes, Niels & Lensink, Robert, 2000. "Financial system development in transition economies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(4), pages 507-524, April.
    10. Smith, R. Todd & van Egteren, Henry, 2005. "Interest rate smoothing and financial stability," Review of Financial Economics, Elsevier, Elsevier, vol. 14(2), pages 147-171.
    11. Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "Determinants of commercial bank interest margins and profitability : some international evidence," Policy Research Working Paper Series 1900, The World Bank.
    12. Kane, Edward J., 2000. "Designing financial safety nets to fit country circumstances," Policy Research Working Paper Series 2453, The World Bank.

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