Deposit Insurance: Actual and Good Practices
Occasional Papers, January 1, 2000
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- Deposit Insurance: Actual and Good Practices
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Bibliographic details
- Authors: G. G. Garcia
- Published: January 1, 2000
- Series: Occasional Papers
- DOI: https://doi.org/10.5089/9781557759481.084
Summary
- A well-designed deposit guarantee system can strengthen incentives for owners, managers, depositors and other creditors, borrowers, regulators and supervisors, and politicians.
- Borrowers should be aware that they will have to repay their loans if their bank fails and will be encouraged to keep their loans current where offsetting is limited to past-due loans.
- The performance of insurers, regulators, and supervisors as agents will improve where they know that they can take justifiable actions without political interference and will be held accountable for their actions to their principals.
- Despite the improvements, and possibly partly because there are issues in deposit insurance design that remain to be resolved, financial crises have been prevalent during the 1990s.
- This situation has forced a number of countries to offer a blanket guarantee to restore confidence and to allow the continued functioning of the financial system while the authorities take time to design a plan for the resolution of the crisis.
Key findings and observations
- Deposit guarantee systems affect incentives across multiple stakeholder groups: owners, managers, depositors and other creditors, borrowers, regulators and supervisors, and politicians.
- Limiting offsetting to past-due loans encourages borrowers to keep loans current.
- Political interference weakens the ability of insurers, regulators, and supervisors to act justifiably and be accountable.
- Prevalence of financial crises in the 1990s prompted some countries to adopt blanket guarantees as a temporary crisis-management tool.
Policy implications and practice considerations
- Design deposit insurance to align incentives for borrowers, depositors, creditors, and bank management.
- Ensure insurers, regulators, and supervisors can act without political interference and are held accountable to their principals.
- Recognize that blanket guarantees may be used to restore confidence and maintain financial system functioning while resolution plans are developed.
Scope and subject classifications
- Subjects: Bank deposits, Banking, Commercial banks, Deposit insurance, Financial crises, Financial institutions, Financial services, Lender of last resort, Systemic crises
- Keywords: Africa, Asia and Pacific, Bank deposits, Commercial banks, country, deposit, deposit guarantee, Deposit insurance, Europe, Global, guarantee, importance to the economy, insurance agency, insurance system, Lender of last resort, lender-of-last-resort facilities, Middle East, OP, Systemic crises