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Design, Structure and Implementation of a Modern Deposit Insurance Scheme

Editor

Listed:
  • Morten Balling

Author

Listed:
  • Beat Bernet
  • Susanna Walter

Abstract

One of the important consequences to be drawn from the course of the financial crisis up to now is the insight that more attention must be paid in the future to the factors of liquidity, liquidity management and liquidity protection. That holds true for the protection of the stability of an individual bank as it does for that of a whole national or even international financial system. The liquidity problems of a bank can certainly have a variety of causes. However, as an examination of the history of bank insolvencies and financial crises shows, an accelerated withdrawal of bank deposits by unsecured customers nearly always leads in the end to the collapse of an institution and, as an ultimate consequence, to a national or even international banking crisis. This insight has also brought the deposit insurance institutions in many countries around the world to the attention of political, regulatory and banking management discussions. The rapid, politically necessary, factually often not well founded, guarantee promises made by many governments have shown those responsible that in Europe the need for a fundamental revision of the present deposit insurance schemes must be urgently addressed. In most industrialized countries of the OECD, as well as in a range of other states, working groups are studying the necessary revisions and adjustments of the relevant institutions to meet the new economic and political conditions. Even if solutions of this sort continue to be arranged differently from one country to another on the basis of differing regulatory, historical and structural circumstances, a consensus is emerging over the important basic questions of deposit insurance system design and architecture. As a result of the worldwide financial crisis most European countries massively increased their coverage limits for their national deposit insurance schemes in the fall of 2008. Where no deposit insurance existed, it was introduced. Existing systems were critically scrutinized. In most countries the maximum insurance coverage was raised and the eligible deposit base was extended. Some individual states have even promised an unlimited deposit protection (in some cases with a time restriction). Under the pressure of an increasing number of bank failures these promises were made without revising the existing deposit insurance schemes themselves. In the course of 2009, both the individual European states and the EU itself then set about scrutinizing their existing protection schemes and mechanisms and revising the existing national deposit insurance schemes. It is accepted throughout the world that well designed deposit insurance is an important element in a national safety net for maintaining and extending the stability of the financial system. The design and structure, but also the implementation, of a deposit insurance scheme (DIS) of this sort throws up numerous institutional, procedural and instrumental questions. Such operative and strategic issues must be answered against the background of the overall national circumstances and in line with the country specific realities of the respective financial intermediate system. However, there is a series of topics that can be assessed and solved independently of such individual circumstances. This is even more the case since the worldwide revision of the deposit insurance schemes offers the opportunity to create the conditions for a future harmonization of national deposit insurance schemes at least within Europe. An assimilation of this sort is, in turn, the basis for future EU-wide or perhaps even European depositor protection, which, like any broadly based guarantee, would certainly be more efficient than a multitude of national solutions. This publication intends to make a contribution to the ongoing discussion of the complex questions connected with the further development of European deposit insurance schemes. Both complementing and extending the broad range of theoretical literature available, it focuses on some key design questions of modern deposit insurance schemes, on the discussion of their basic structural elements and on the appropriate consequences for the stakeholders in deposit insurance. We focus on: - the derivation of the most important requirements of a modern European deposit insurance, and the - discussion of specific organizational aspects and fundamental institutional requirements as well as of solutions for selected system building blocks. The first chapter analyzes the institutional framework of deposit insurance schemes and its various aspects of cost/benefit considerations. The second chapter discusses the fundamentals of modern deposit insurance. The third chapter examines selected strategic and instrumental questions concerning the organization and implementation of deposit insurance schemes. The fourth chapter focuses on some questions related to the international harmonization and coordination of the design of deposit insurance schemes. In all sections we address some lessons learned from the recent financial turmoil. The fifth chapter finally addresses some conclusions and sketches some policy implications for designing and implementing a modern deposit insurance scheme.

Suggested Citation

  • Beat Bernet & Susanna Walter, 2009. "Design, Structure and Implementation of a Modern Deposit Insurance Scheme," SUERF Studies, SUERF - The European Money and Finance Forum, number 2009/5 edited by Morten Balling, May.
  • Handle: RePEc:erf:erfstu:57
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    References listed on IDEAS

    as
    1. Schich, Sebastian T., 2009. "Challenges Associated with the Expansion of Deposit Insurance Coverage during Fall 2008," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-23.
    2. Sebastian Schich, 2008. "Financial turbulence: Some lessons regarding deposit insurance," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2008(1), pages 55-79.
    3. Sebastian Schich, 2009. "Financial crisis: Deposit insurance and related financial safety net aspects," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2008(2), pages 1-39.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Kleimeier - Ros, Stefanie & Qi, Shusen & Sander, H., 2016. "Deposit Insurance in Times of Crises: Safe Haven or Regulatory Arbitrage? (RM/15/026-revised-)," Research Memorandum 026, Maastricht University, Graduate School of Business and Economics (GSBE).
    2. International Association of Deposit Insurers, 2012. "Handling of Systemic Crises," IADI Research Papers 12-10, International Association of Deposit Insurers.
    3. Magdalena Kozińska, 2022. "The non‐payout functions of deposit insurance schemes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1749-1768, April.
    4. International Association of Deposit Insurers, 2015. "Integrated Protection Schemes," IADI Research Papers 15-03, International Association of Deposit Insurers.
    5. Muhammad Afdi Nizar & Alfan Mansur, 2023. "Can the Indonesian banking industry benefit from a risk-based deposit insurance system?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 16(1), pages 177-196, January.
    6. A. Michael Andrews, 2014. "The role of deposit insurance in financial stability: issues and options in the ASEAN+3," Chapters, in: Iwan J. Azis & Hyun S. Shin (ed.), Global Shock, Risks, and Asian Financial Reform, chapter 11, pages 416-463, Edward Elgar Publishing.
    7. Jacopo Carmassi & Sonja Dobkowitz & Johanne Evrard & Laura Parisi & André F Silva & Michael Wedow, 2020. "Completing the Banking Union with a European deposit insurance scheme: who is afraid of cross-subsidization?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 35(101), pages 41-95.
    8. Marius Clemens & Stefan Gebauer & Tobias König, 2020. "The Macroeconomic Effects of a European Deposit (Re-) Insurance Scheme," Discussion Papers of DIW Berlin 1873, DIW Berlin, German Institute for Economic Research.
    9. Pilar Gómez-Fernández-Aguado & Antonio Partal-Ureña & Antonio Trujillo-Ponce, 2013. "Evaluating the effects of the EU directive proposal for risk-based deposit insurance premiums in Spain," Working Papers 13.01, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    10. Larisa Mistrean, 2017. "Development Of Deposits Guarantee In The Banking System Of Moldova," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 1(45), pages 180-190, November.
    11. Kleimeier, S. & Qi, S. & Sander, H., 2015. "Deposit insurance in times of crises : safe haven or regulatory arbitrage?," Research Memorandum 026, Maastricht University, Graduate School of Business and Economics (GSBE).
    12. Stefanie Kleimeier & Harald Sander & Shusen Qi, 2019. "Deposit Insurance and Cross-Border Deposits in Times of Banking Crises," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 17(01), pages 09-13, May.
    13. repec:ces:ifodic:v:17:y:2019:i:1:p:50000000005872 is not listed on IDEAS
    14. Aida Barkauskaite & Ausrine Lakstutiene & Justyna Witkowska, 2018. "Measurement of Systemic Risk in a Common European Union Risk-Based Deposit Insurance System: Formal Necessity or Value-Adding Process?," Risks, MDPI, vol. 6(4), pages 1-21, December.
    15. Pilar G -Fernᮤez-Aguado & Antonio Partal-Ure & Antonio Trujillo-Ponce, 2014. "Moving toward risk-based deposit insurance premiums in the European Union: the case of Spain," Applied Economics, Taylor & Francis Journals, vol. 46(13), pages 1547-1564, May.
    16. Fendel Ralf & Stremmel Hanno, 2016. "Characteristics of Banking Crises: A Comparative Study with Geographical Contagion," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 236(3), pages 349-388, May.
    17. T. To D. & Т. То Д., 2016. "Реструктуризация банковской системы: пример Вьетнама // Restructuring the Banking System: the Case of Vietnam," Review of Business and Economics Studies // Review of Business and Economics Studies, Финансовый Университет // Financial University, vol. 4(4), pages 32-54.
    18. Kusaya, Charles & O’Keefe, John P. & Ufier, Alexander B., 2023. "Bridging the gap from the current deposit insurance fund to a fund target," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 148-157.
    19. Vesna Micajkova, 2013. "Deposit Insurance in Times of Financial Crisis," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 11(2), pages 165-176.

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    More about this item

    Keywords

    Deposit insurance; risk-based premium; risk-adjusted pricing; premium calculator; system risk; fund size; funding; guarantee promises; depositor categories; eligible deposits; covered deposits; membership; expected loss; pan-european deposit insurance system; moral hazard; resolution regime; payout;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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