Deposit Insurance Around the Globe: Where Does it Work?

Abstract

Developing countries should first address weaknesses in their informational and supervisory environments before adopting explicit deposit insurance.

Explicit deposit insurance has been spreading rapidly in recent years, even to countries not advanced in financial and institutional development. Economic theory indicates that deposit insurance design features interact - for good or ill - with country-specific elements of the financial and governmental contracting environment. Demirguc-Kunt and Kane document the extent of cross-country differences in deposit insurance design and review empirical evidence on how design features affect private market discipline, banking stability, financial development, and the effectiveness of crisis resolution. This evidence challenges the wisdom of encouraging countries to adopt explicit deposit insurance without first addressing weaknesses in their informational and supervisory environments.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to improve the design of deposit insurance systems. The authors may be contacted at [e-mail] or [e-mail].