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The Incentive-Compatible Design of Deposit Insurance and Bank Failure Resolution

In: Who Pays for Bank Insolvency?

Author

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  • Thorsten Beck

Abstract

Deposit insurance and bank failure resolution are important parts of the financial safety net and an incentive-compatible design of both can minimize the probability and cost of financial fragility. The absence of explicit deposit insurance or the proper design of an explicit scheme can encourage large depositors and creditors to monitor banks and exert market discipline, thus reducing the risk of aggressive risk-taking by banks and thus the risk of financial fragility. Effective and timely resolution of failed banks can decrease the cost that bank failures can cause to the banking system. An incentive-compatible design of bank failure resolution can contain aggressive risk-taking by banks and thus reduce the probability of bank failures ex-ante.

Suggested Citation

  • Thorsten Beck, 2004. "The Incentive-Compatible Design of Deposit Insurance and Bank Failure Resolution," Palgrave Macmillan Books, in: Who Pays for Bank Insolvency?, chapter 4, pages 118-141, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-52391-3_5
    DOI: 10.1057/9780230523913_5
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    Cited by:

    1. Beck, Thorsten & Laeven, Luc, 2006. "Resolution of failed banks by deposit insurers : cross-country evidence," Policy Research Working Paper Series 3920, The World Bank.
    2. Beck, Thorsten, 2008. "Bank competition and financial stability : friends or foes ?," Policy Research Working Paper Series 4656, The World Bank.
    3. Amr Khafagy, 2018. "Regulation, supervision and deposit insurance for financial cooperatives: an empirical investigation," Annals of Finance, Springer, vol. 14(2), pages 143-193, May.

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