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Pricing of deposit insurance

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  • Laeven, Luc

Abstract

The author aims to provide guidelines for the pricing of deposit insurance in different countries. He presents several methodologies that can be used to set benchmarks for the pricing level of deposit insurance in a country, and quantifies how specific design features affect the cost of deposit insurance. The author makes several contributions to our understanding of what drives the price of deposit insurance. For example, he shows how risk diversification and risk differentiation within a deposit insurance system can reduce the price of deposit insurance. The author also finds that deposit insurance is under-priced in many countries around the world, notably in several developing countries. More important, his estimates suggest that many countries cannot afford deposit insurance. Deposit insurance is unlikely to be a viable option in a country with weak banks and institutions. The author does not recommend a funded deposit insurance scheme, but rather he argues that for countries that have adopted or are adopting deposit insurance and have decided to pre-fund it, pricing it as accurately as possible is important.

Suggested Citation

  • Laeven, Luc, 2002. "Pricing of deposit insurance," Policy Research Working Paper Series 2871, The World Bank.
    • Handle: RePEc:wbk:wbrwps:2871
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    References listed on IDEAS

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    Cited by:

    1. Robert Cull & Lemma Senbet & Marco Sorge, 2004. "Deposit Insurance and Bank Intermediation in the Long Run," BIS Working Papers 156, Bank for International Settlements.
    2. Markus R. Kosters & Stefan T.M. Streatmans & Mario Maggi, 2011. "Pricing Full Deposit Insurance in Germany amidst the Financial Crisis 2008-2010," Quaderni di Dipartimento 143, University of Pavia, Department of Economics and Quantitative Methods.
    3. Kane, Edward J. & Klingebiel, Daniela, 2004. "Alternatives to blanket guarantees for containing a systemic crisis," Journal of Financial Stability, Elsevier, vol. 1(1), pages 31-63, September.
    4. Ilhyock Shim, 2011. "Dynamic Prudential Regulation: Is Prompt Corrective Action Optimal?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1625-1661, December.
    5. Julian Kolm & Christian Laux & Gyöngyi Lóránth, 2017. "Bank Regulation, CEO Compensation, and Boards," Review of Finance, European Finance Association, vol. 21(5), pages 1901-1932.
    6. Martynova, Natalya & Ratnovski, Lev & Vlahu, Razvan, 2020. "Bank profitability, leverage constraints, and risk-taking," Journal of Financial Intermediation, Elsevier, vol. 44(C).
    7. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does deposit insurance affect bank risk? Evidence from the recent crisis," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 312-321.
    8. Ralf Bebenroth & Diemo Dietrich & Uwe Vollmer, 2009. "Bank regulation and supervision in bank-dominated financial systems: a comparison between Japan and Germany," European Journal of Law and Economics, Springer, vol. 27(2), pages 177-209, April.
    9. Diego Nocetti, 2006. "Central bank´s value at risk and financial crises: An application to the 2001 Argentine crisis," Journal of Applied Economics, Universidad del CEMA, vol. 9, pages 381-402, November.
    10. Honohan, Patrick, 2003. "Avoiding the pitfalls in taxing financial intermediation," Policy Research Working Paper Series 3056, The World Bank.
    11. Caprio, Gerard & Honohan, Patrick, 2004. "Can the unsophisticated market provide discipline?," Policy Research Working Paper Series 3364, The World Bank.
    12. Julien Reynaud, 2007. "Une analyse optionnelle des crises bancaires turques de 1994 et 2000-2001," Revue d'Économie Financière, Programme National Persée, vol. 87(1), pages 241-246.
    13. Natalya Martynova & Mr. Lev Ratnovski & Mr. Razvan Vlahu, 2015. "Bank Profitability and Risk-Taking," IMF Working Papers 2015/249, International Monetary Fund.
    14. Hoque, Hafiz & Andriosopoulos, Dimitris & Andriosopoulos, Kostas & Douady, Raphael, 2015. "Bank regulation, risk and return: Evidence from the credit and sovereign debt crises," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 455-474.
    15. Djurdjica Ognjenovic, 2006. "Basic Principles of Financial Planning in Ex-ante Deposit Insurance Schemes," Financial Theory and Practice, Institute of Public Finance, vol. 30(4), pages 369-380.
    16. Grira, Jocelyn & Hassan, M. Kabir & Soumaré, Issouf, 2016. "Pricing beliefs: Empirical evidence from the implied cost of deposit insurance for Islamic banks," Economic Modelling, Elsevier, vol. 55(C), pages 152-168.
    17. Mao Hong & Ostaszewski Krzysztof M., 2009. "Alternative Pricing Models of Deposit Insurance under Capital Forbearance," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 3(2), pages 1-10, April.
    18. International Association of Deposit Insurers, 2011. "General Guidance for Developing Differential Premium Systems," IADI Guidance Papers 11-10, International Association of Deposit Insurers.
    19. Luc Laeven, 2004. "The Political Economy of Deposit Insurance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(3), pages 201-224, December.
    20. Camara, Modibo K. & Montes-Negret, Fernando, 2006. "Deposit insurance and banking reform in Russia," Policy Research Working Paper Series 4056, The World Bank.
    21. Petr Dvořák, 2008. "The Principles of Efficient Banking Deposit Insurance System ABSTRACT [Principy efektivního systému pojištění bankovních depozit]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2008(4), pages 21-28.
    22. Tomislav Galac, 2005. "Does Croatia Need Risk-Based Deposit Insurance Premia?," Surveys 10, The Croatian National Bank, Croatia.
    23. International Association of Deposit Insurers, 2020. "Evaluation of Differential Premium Systems for Deposit Insurance," IADI Research Papers 20-06, International Association of Deposit Insurers.
    24. Huizinga, H.P., 2003. "Comment on 'European banking, past, present, and future'," Other publications TiSEM c8499086-f8f7-4474-ab06-7, Tilburg University, School of Economics and Management.
    25. Demirguc-Kunt, Asli & Kane, Edward J. & Laeven, Luc, 2006. "Deposit insurance design and implementation : policy lessons from research and practice," Policy Research Working Paper Series 3969, The World Bank.

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