Do Deposit Insurance Systems Promote Banking Stability?

Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation

Based on evidence for 61 countries in 1980-97, this study finds that explicit deposit insurance tends to increase the likelihood of banking crises, the more so where bank interest rates are deregulated and the institutional environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors, where the...

Banking on Reciprocity: Deposit Insurance and Insolvency

There is an empirical connection between deposit insurance, risktaking, and insolvency. We argue that if banks maximize profit this amounts to a puzzle (even taking into account that deposit insurance decreases incentives for customers to monitor banks). However, we show that the empirical regularities can be well captured if bankers are motivated by reciprocity towards their customer base.

Banking and Deposit Insurance as a Risk-Transfer Mechanism

This paper models an economy in which risk-averse savers and risk-neutral entrepreneurs make investment decisions. Aggregate investment in high-yielding risky projects is maximized when risk-neutral agents bear all nondiversifiable risks. A role of banks is to assume nondiversifiable risks by pledging their capital in addition to diversifying risks. Banks, however, do not completely eliminate r...

Banking With and Without Deposit Insurance : Mexico ’ s Banking Experiments , 1884 - 2004

Optimal Deposit Insurance

This paper characterizes the optimal level of deposit insurance (DI) when bank runs are possible. In a wide variety of environments, the optimal level of DI only depends on three sufficient statistics: the sensitivity of the likelihood of bank failure with respect to the level of DI, the utility loss caused by bank failure (which is a function of the drop in depositors’ consumption) and the exp...