Deposit insurance

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Bank Deposit Insurance and EMU

Bank Deposit Insurance and EMU

latter bankruptcy assume the losses. In return, the Deposit Insurance Fund must be given real decision-making power in bankruptcy, and use it to clearly state the rules of the game. The longer an insolvent depositary institution remains in business, the more its managers are tempted to engage in risky lending operations hoping for high returns, which are obviously associated with high probability of losses, plus uninsured depositors have time to withdraw their deposits and therefore more potential losses ultimately transferable to the Deposit Insurance Fund increases. Faced with this state of affairs, proposals have been made to make the resolution of bank failures more transparent and, in so doing, to make banks' managers more accountable. The most interesting proposals in this area are those that propose early reorganisations or closures of insolvent banks on the basis of clearly pre-established rules of the game in order to limit the present and future potential losses on deposit insurance. Ainsi, G. Benston et G. Kaufman outlined a method for settling bank insolvency, based on two proposals: - adopting a mark-to- market system to identify problem banks before net worth becomes negative, so here we find an additional argument in favor such accounting policies; - an order to reorganize or close down deposit-taking institutions in the event that regulatory capital (measured at the market value of assets and debts) falls below a pre-determined level.
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Deposit Insurance System and the Commercial Bank Loan Loss Provisions

Deposit Insurance System and the Commercial Bank Loan Loss Provisions

Loan loss provisions are a reflection of the principle of caution accounting, its purpose is to enhance the bank risk prevention ability, promote the stable opera- tion of commercial bank. If commercial banks’ loan loss provisions were bigger, the lower individual risk and spillover risk would be. The behavior of income smoothing weakens the defense capabilities of loan loss provisions. If commer- cial banks are influenced by the behavior and fails to extraction and preparation, the individual risk and the spillover risk would be higher than before [18]. Fol- lowing the promulgation of the deposit insurance system, as banks need to take the risk of more and more high, so in order to enhance their risk coping ability, smooth behavior will reduce profit, to alleviate pressure caused by system prom- ulgated by the new. Deposit insurance system in our country, on the other hand, set the highest pay limitation of 500,000 covers 99.63% of the depositors in Chi- na, the depositors deposit is basic get effective guarantee. Based on this, the de- positor is more of a turn on bank deposit rates. If the bank to raise the interest rates on deposits, it needs a high income, and yield of the reaction on its profits. A lucrative as a result, banks will not choose the behavior of income smoothing any more, instead, they hope depositors and investors deliver a good news through high profits. Let them have a good attitude for the banks, which attract a large number of depositors deposit. On the basis of this paper proposed a third hypothesis:
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Completing the Banking Union: Deposit Insurance  CEPS Policy Brief No  335, 3 December 2015

Completing the Banking Union: Deposit Insurance CEPS Policy Brief No 335, 3 December 2015

In reality, however, resolution and deposit insurance are of quite a different nature; and the rationale for fully centralising deposit insurance is much weaker than for resolution. The purpose of bank resolution is to avoid an insolvency with all the costs and contagion effects it might generate. Resolution thus aims to ensure continuity of those main functions of a bank that are deemed to be of systemic importance. Public funding is needed only to the extent that no private-sector solution can be organised on short notice. The purpose of a resolution fund is to finance investment in a new bank (to be carved out of the failing one) – not to give money away. A well-run resolution fund should thus be profitable. By contrast, a deposit insurance fund can only make losses, as it is used when a bank has failed and the losses are so large that depositors cannot get their money back. In short, a resolution fund invests in the future, whereas a deposit insurance fund pays for losses from the past.
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Chances for Pan European deposit insurance : what explains national positions to the recast directive on deposit quarantee schemes?

Chances for Pan European deposit insurance : what explains national positions to the recast directive on deposit quarantee schemes?

After all, one might only conjecture about their impact on the final outcome. It however seems that they do have played a role, since covenants on membership, payout, funding and mutual borrowing have been relaxed substantially. However, it seems that interests on deposit insurance policies in Europe still cluster nationally rather than transnationally. In fact, national traditions on deposit protection, which manifest in domestic institutions, encourage national sooner than trans-regional interest mobilization. Groups hence articulate preferences through national governments to most extent. It thus appears that European integration of deposit protection meets liberal intergovernmentalist more than does it comply with neofunctionalist assumptions as interests are bound by national institutions. In terms of integrative strategies given by neofunctionalism, however, the new proposal would upgrade the level of integration, in raising decision-making powers of e. g. the Commission or the European Banking Authority (see mutual borrowing). However, policy changes seem too marginal as to identify any substantive progress in European cooperation on deposit insurance.
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The Role of Deposit Insurance System in Times of Financial Crisis:  Can Increased Coverage Limit Sustain Banking Stability? The Evidence of Former Soviet States

The Role of Deposit Insurance System in Times of Financial Crisis: Can Increased Coverage Limit Sustain Banking Stability? The Evidence of Former Soviet States

assumption is made by Hoelscher (2011) when sug- gesting that policies needed in stable times should differ from those needed in a broad financial crisis. According to him in systemic crisis deposit insur- ance was inadequate for stabilizing expectations as no one knows true financial conditions of the system and future profitability of any business model. In this circumstances full guarantees are needed to contain the crisis. As he states the assumptions about the role of deposit insurance in depositor protection and main- taining financial stability has evolved and its role in the safety net has been strengthened, but it underwent important changes in light of the 2008/9 global crisis These changes are leading to a rethinking of the op- timal design features of the deposit insurance system to further strengthen depositor protection and hence the role above.
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Effects of Deposit Insurance on Self Discipline of Bank Franchise Value

Effects of Deposit Insurance on Self Discipline of Bank Franchise Value

However, the relationship between the franchise value and the risk will change with the background of the system. So it is necessary to consider the background of the system when studying the relationship between the franchise value and the risk. Research shows that China has a government invisible guarantee for a long time. The implicit guarantee provided by the government played a role in the poorly managed banks, which made the banks no longer worry about bankrupt- cy and lost the franchise value, eventually weaken the role of franchise value and made bank prudent management. In recent years, some scholars have studied the self-discipline effect of the franchise value in our country based on the invis- ible guarantee background. Most scholars have pointed out that the existence of the implicit insurance system does weaken the self-discipline of the franchise va- lue to varying degrees. There are many insights on how to restore the self-dis- cipline effect of the franchise value of our country. The mainstream view is that the establishment of reasonable deposit insurance system can reduce “bottom expected” of poorly managed banks, thereby, restoring the attention to the bank franchise value, more prudent in the management. However, the scholars’ sug- gestions are only theoretical expectations. Since there is no explicit deposit in- surance system in China, the impact of the explicit deposit insurance system on the self-regulation effect of the franchise value has not been tested empirically.
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The Effect of Deposit Insurance on Risk Taking in Asian Banks

The Effect of Deposit Insurance on Risk Taking in Asian Banks

that are low in political conditions and high in corruption, explicit deposit insurance has adverse effects. Laeven (2002a) stretches further to acknowledge that existing insurance schemes create moral hazard for banks but the magnitude of incentive problems differs due to variation in governance structures and institutional environments. He (2002 a, b) investigates the effect of deposit insurance on risk-taking measured by implicit value of deposit insurance services and suggests that a deposit premium has some power in forecasting bank failures because the cost of insurance reflects the riskiness of deposit-taking institutions. Analyzing bank-level data for 100 countries including 41 emerging markets, Angkinand and Wihlborg (2006) find a robust estimation for a non-linear relationship between deposit insurance coverage and bank risk-taking. They note that effects of ownership structure on risk-taking differ through market discipline and optimal deposit insurance coverage varies in countries in Asia and Eastern Europe.
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Moral hazard in a voluntary deposit insurance system: Revisited

Moral hazard in a voluntary deposit insurance system: Revisited

There is evidence, then, that the Kansas deposit insurance system suffered from moral hazard. Insured banks, for instance, held a capital/assets ratio that on average was 1.15 percentage points smaller than uninsured banks. 10 In contrast, W&K estimated that insured banks held a capital/assets ratio that on average was 2.81 percentage points smaller than uninsured banks. On the other hand, insured banks held a surplus/loans ratio that on average was 1.32 percentage points smaller than uninsured banks. 11 In contrast, W&K found no significant effect of bank insurance membership on bank surplus/loans ratio. Finally, like W&K, this paper finds no evidence that bank insurance membership was a determinant of bank cash/deposit and loans/assets ratios.
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The Problem of Moral Hazard and Effects of Deposit Insurance Project

The Problem of Moral Hazard and Effects of Deposit Insurance Project

However, risk-based deposit insurance premiums alone can not control moral hazard in deposit insurance. If deposit insurers observe the banks' investment strategy and there is full information about bank investment decisions risk-based premiums are sufficient to control risk. Deposit insurer sets lower risk based premium if bank takes safe investment strategy and higher one if it chooses riskier activities. Under full information conditions risk-based deposit insurance premiums can thus succeed. But if deposit insurer no longer observes the banks' investment strategy and its private information for bank that is hidden action or moral hazard model, risk based premiums can not control moral hazard and state contingent payments are needed. That considers recommended investment strategies to banks and the payoff a bank would receive from taking this investment will be different from when it chooses any other alternative investment strategies, thus different returns can be the determinant of different risk premiums. Private information requires richer deposit insurance pricing schemes. This is not to say that risk based premiums are not useful but that they are only one component of the entire deposit insurance price system. Beside deposit insurer may spend resources reducing private information; the actions may be taken by deposit insurer can be the supervisory activities like safety and soundness exams, auditing. The bank may choose not to supply the screening effort but in this case it is considered that bank chooses risky investment strategy and will become the subject of more severe deposit insurance premium (Edward Simpson Prescott, 2002).
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Blanket guarantee, deposit insurance, and risk shifting incentive: evidence from Indonesia

Blanket guarantee, deposit insurance, and risk shifting incentive: evidence from Indonesia

The 2008 global financial crisis forced some neighboring countries to increase their insurance coverage limit. Australia, Thailand, Hong Kong, Taiwan, and South Korea removed their deposit insurance caps. Singapore and Malaysia moved further by providing blanket guarantees. Indonesia was indirectly affected by these changes because capital could flow from Indonesia to these countries. As a result, the government later increased the deposit insurance cap from 100 million rupiah to 2 billion rupiah in October 2008. To maintain public trust in the national banking system, the government through IDIC bailed out Century Bank, a small bank which collapsed in the middle of the global financial crisis because of management fraud and most likely its condition was not related to the global financial crisis. A summary of the history of the Indonesian deposit insurance/guarantee system is provided in Figure 1.
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Islamic banks, deposit insurance reform, and market discipline: evidence from a natural framework

Islamic banks, deposit insurance reform, and market discipline: evidence from a natural framework

Although it has been intensively claimed that Islamic banks are more subject to market discipline, the empirical literature is surprisingly mute on this topic. To fill this gap and to verify the conjecture that Islamic bank depositors are indeed able to monitor and discipline their banks, we use Turkey as a test setting. The theory of market discipline predicts that when excessive risk taking occurs, depositors will ask higher returns on their deposits or withdraw their funds. We look at the effect of the deposit insurance reform in which the dual deposit insurance was revised and all banks were put under the same deposit insurance company in December 2005. This gives us a natural experiment in which the effect of the reform can be compared for the treatment group (i.e., Islamic banks) and control group (i.e., conventional banks). We find that the deposit insurance reform has increased market discipline in the Turkish Islamic banking sector. This reform may have upset the sensitivities of the religiously inspired depositors, and perhaps more importantly it might have terminated the existing mutual supervision and support among Islamic banks.
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A European Deposit Insurance and Resolution Fund. CEPS Working Document No. 364, 10 May 2012

A European Deposit Insurance and Resolution Fund. CEPS Working Document No. 364, 10 May 2012

To put the numbers in perspective, the EDIRF would amount to €55 billion of private funds accumulated from contributions by the EBA banks as a first line of defence for deposit insurance and resolution, while the ESM (scheduled to start in July 2012) amounts to €500 billion of public funds underwritten by the euro area members as a fiscal backstop for sovereign countries as well as financial institutions. An interesting question is whether the EDIRF could cope with the failure of one or more EBA banks. Dermine (2000) takes the book value of equity as a yardstick for the potential costs of a rescue package.
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Expected Effect of Deposit Insurance System Over the State of the Banking Environment of Georgia

Expected Effect of Deposit Insurance System Over the State of the Banking Environment of Georgia

According to the responses of the population under the study absolute majority of respondents, about 98% or 488 people would immediately run to banks where they have deposited their savings to withdraw funds in case of any political or economic instability. Only 12 people prefer to wait just a little to see further developments on the market. Situation has dramatically changed under deposit insurance system. 247 respondents running to the bank before deposit insurance system is implemented in Georgia say that they would feel better secured if deposit insurance system is introduced to the Georgian banking system and would not run to the banking institutions for early withdrawal.
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Does Deposit Insurance Improve Financial Intermediation? Evidence from the Russian Experiment

Does Deposit Insurance Improve Financial Intermediation? Evidence from the Russian Experiment

One of the primary goals of deposit-insurance implementation was to draw out the estimated USD40 billion in cash savings held by Russian citizens “under their mattresses” and outside of the banking system, which then could be used by banks as the basis for new loans. Specifically, the Law on Deposit Insurance defined three closely related goals: (i) the protection of depositors’ funds, (ii) the increase in the depositors’ confidence in the Russian banking system and (iii) the attraction of household savings in the Russian banking system. These goals arose out of historical experience of Russian depositors, who had been victimized by the losses suffered during the banking crises of 1992, 1995, and 1998, which collectively led to a loss of confidence in privately owned banks.
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Estimating Probability Distribution of Asset Value Based on Dual Effects of Deposit Insurance with the Minimum Cross Entropy Principle

Estimating Probability Distribution of Asset Value Based on Dual Effects of Deposit Insurance with the Minimum Cross Entropy Principle

Three scenarios are given to describe situations with different dual effects of deposit insurance. The corre- sponding assets distribution functions are obtained re- spectively. The results show that the supervision level positively affects the risk aversion effects of deposit in- surance under the same benefit effects. While the in- crease of the deposit insurance premium moves the bank’s assets distribution slightly to the right side. The distributions, which are estimated under different benefit and risk objects, can be taken as a reference for banks to choose the proper credit projects.
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Basic Principles of Financial Planning in Ex-ante Deposit Insurance Schemes

Basic Principles of Financial Planning in Ex-ante Deposit Insurance Schemes

an existing regulatory body or government agency, but in any case the rules that govern its activities should always be clear in advance and prescribed in regulatory form. As in the insurance industry of the convention kind, the credibility of the insurer matters, even more so because depositors (i.e. those whose deposits are insured) do not have the abil- ity to choose the insurer on the market. In other words, deposit insurance is a monopo- listic business. Whatever goals, authority-given or management-chosen, a deposit insur- ance scheme (further: DIS) always has the same task – to repay depositors in failed banks in a short time in order to prevent panicky domino effects and to preserve the stability of the financial system in general, together with other market participants. However per- fect regulation may be, and however much procedures may be in place, the most crucial time for any DIS is when there is financial distress on the horizon. If a deposit insurance scheme fails when it is in the spotlight the damage is huge and credibility cannot be re- stored easily. That is why the financial planning of adequate resources in the deposit in- surance business is of great importance. It is a technical issue, more important from an operational perspective for the effectiveness of a DIS than from that of theory. But the- ory should provide, at least, some clear internationally accepted guidelines for sound fi- nancial planning practice.
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The economics of banking crisis, regulation and deposit insurance

The economics of banking crisis, regulation and deposit insurance

This chapter will come back to the study of the effects th a t deposit insurance has on the equilibrium behaviour of depositors and banks, while abstracting from the problem of insurance pricing. In particular, I want to consider w hether th e empirical findings described above can be supported by this model. I will consider Goldstein and P auzner’s (2000) model of inform ation-based bank runs, where private inform ation allows for a unique equilibrium. I will show th a t while consumers achieve b etter risk-sharing in a com petitive banking system th an in autarky, more solvent projects are liquidated as uninsured depositors fail to coordinate in a subset of fundam entals, and run on banks they know to be solvent. W hen introducing deposit insurance, I show th a t its effectiveness in eliminating panic runs varies with th e size of coverage and the degree of supervisory involvement of th e agency in charge of insurance. U nder a narrow m andate (when the agency is not involved in the supervision of banks), a deposit insurance contract preserving the m onitoring role of depositors involves offering less th an full protection. The trade-off is th a t panic runs cannot be completely elim inated w ith a partial guarantee, although it does reduce the region of fundam entals for which th a t occurs. U nder a broad m andate (with a high degree of supervisory involvement), I show th a t panic runs tend to disappear for any level of insurance as th e regulator’s signal becomes more precise, given th a t liquidity assistance is com m itted to solvent but illiquid banks. Moreover, it is cost efficient never to provide liquidity to insolvent banks. However, only extremely insolvent banks are closed, and those w ith enough funds to cover the paym ent of the final period guarantee are allowed to continue in operation. Therefore, the smaller the protection offered to depositors, the higher is forbearance. All these results hold, irrespective of the specific values of the guarantee, which in particular might imply th e social cost of deposit insurance to be lower under a broad m andate. Finally, I show th a t deposit insurance increases the equilibrium value of the dem and deposit contract in the interim period and so the probability of runs, a t least for high levels of the guarantee, bu t this effect seems also to be smaller under a broad m andate. Limited insurance can contain this externality to some extent, justifying the observed conduct of governments across the world in norm al times.
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ROLE OF DEPOSIT INSURANCE IN PROTECTING THE ECONOMY OF INDIA

ROLE OF DEPOSIT INSURANCE IN PROTECTING THE ECONOMY OF INDIA

Banks are always prone to the risk of failures so the need for establishment of an effective system is a must. Deposit insurance is one the option to protect the interest of depositors and maintain financial stability in the economy. Financial safety net is sine qua non for addressing macro-financial risks. Deposit insurance, a major aspect of financial safety, plays a crucial role in both ‘crisis prevention’ and ‘crisis management’. It is important that during a financial crisis, in general, and banking crisis, in particular, the “unsophisticated” depositors are assured that their money is safe, albeit to a certain extent. The US Federal Deposit Insurance Corporation (FDIC) is the oldest deposit insurer amongst all, having been established in the post-Great Depression time in 1933. India was the second country, after the US, to provide insurance cover to bank deposits. The Deposit Insurance Corporation Act, which was passed by Parliament after long debates and discussions, received Presidential assent towards the end of 1961. The Act came into force from January 1, 1962, when the Deposit Insurance Corporation (DIC) was established under the aegis of the RBI. However, it is surprising that many are unaware of the facility of deposit insurance. One reason for this could be that in India banks are perceived to be either too-big-to-fail or impossible-to-fail on account of Government or RBI backing. While this may be true for the public sector banks, it certainly is not true in the case of private banks, foreign banks operating in India and the large number of cooperative banks. The reforms are long-pending. It is time the RBI and the Government acted on these.
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Competing risks and deposit insurance governance convergence

Competing risks and deposit insurance governance convergence

Thank you to the LSE PSPE seminar, Kristina Gandrud, Mark Hallerberg, Edward Kane, Jouni Kuha, Simon Hix, Charles Goodhardt, Cheryl Schonhardt-Bailey, Kevin Young, and three anonymous reviewers for helpful comments. An earlier version of this article was presented at the 2011 KPSA World Congress. Replication data and code can be found at the following URL: http://christophergandrud.github.com/di-governance/data.html. 1. Central bank control is treated as distinct. It can be independent, but also tends to be a well-established institution with significant financial resources such as the MoF. Deposit insurance controlled by a cen- tral bank is not examined in detail. Results from analyses with central bank governance as the choice of interest are available upon request. For the full list of countries examined and their observed type of de jure DI governance, see the following URL: http://christophergandrud.github.com/di-governance/ tables.html.
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Banking Instability and Deposit Insurance: The Role of Moral Hazard

Banking Instability and Deposit Insurance: The Role of Moral Hazard

Deposit insurance, however, also creates a moral hazard problem by freeing economic agents from the consequences of their actions (see Calomiris, 1990; Gennote and Pyle, 1991; MacDonald, 1996) on both the liability and the asset sides of a bank’s balance sheet. On the liability side, depositors feel no longer obliged to assess the credit-risk associated with depositing money in a particular bank and end up choosing a bank based on the attractiveness of interest rates on o¤er rather than the bank’s …nancial condition; while on the asset side, the knowledge that depositors will not su¤er in the event of bank failure persuades banks to pursue high return risky business strategies more than they otherwise would (MacDonald, 1996). Thus, the discipline of the market is removed, excess risk taking by existing commercial banks is encouraged and depositors of insured institutions have little incentive to discriminate with respect to where and with whom to place their funds (Calomiris, 1990).
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