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Safety Net Design and Systemic Risk: New Empirical Evidence

  • Klüh, Ulrich

Recent econometric evidence has noticeably changed views on the desirability and the appropriate design of explicit Deposit Insurance Schemes (DIS). The purpose of this paper is to take a second look at the data. After surveying recent empirical work and providing a theoretical framework, we argue that existing studies may suffer from a selection bias. Building on a new database on explicit deposit insurance compiled by the author, we perform a variety of semi-parametric and parametric tests to see whether and how explicit deposit insurance (de)stabilizes banking systems. We find that the evidence indeed suggests that a selection bias is present. Controlling for this bias leads to a reassessment of recent studies. In particular, making deposit insurance explicit has a rather moderate and, if any, stabilizing effect on the probability of experiencing a systemic crisis.

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File URL: http://epub.ub.uni-muenchen.de/662/1/SelectionBias0505.pdf
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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 662.

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Date of creation: Jun 2005
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Handle: RePEc:lmu:muenec:662
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