Deposit insurance scheme, Banking crises, Less-developed countries, Logit model, E52, G22, G32,

No abstract

We examine whether the autonomy of a country's central bank (CB) reduces the probability of a banking crisis. We take a finegrained approach to CB autonomy by disentangling its various components as well. In addition, we look at the joint effects of CB autonomy and the legal tradition on the probability of a banking crisis in a country. Using the cross-country data for CB independence for the period of 1980-1989, and both binary and ordered logit estimation models, this study finds that a country's CB with more autonomy in aggregate can lessen the probability of a banking crisis. When the CB's autonomy is disentangled with respect to its responsibilities, this study finds that the longer the tenure of the CB's chief executive officer, the lower the probability of a banking crisis. We also find that the probability of a banking crisis in the country is reduced even more if the relatively more autonomous CB can perform its duties in line with the country's stronger law-and-order tradition. We also carry out some counterfactual thought experiments along these lines. The aim of this study is to examine empirically the relationship between the level of a central bank's (CB's) autonomy and the instability of the banking system which is defined by the presence of a banking crisis. A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent, and a banking crisis occurs when a sufficient number of banks fail (it can also be weighed by the failed banks' share in total deposits or assets) within a given period (e.g. González-Hermosillo, 1996). 1 Though maintaining price stability is the main goal of a CB, as need arises a CB is seen to play roles that may be inconsistent with its main goal. However, these actions of CB may be necessary for financial stability in the country. The CB bails out the insolvent banks and the publicly owned enterprises, manages the government's financial transactions, finances the budget deficits through the issuance of money and finances the development projects undertaken by the government (Cukierman et al., 1992). These tasks influence the stability of the banking sector directly or indirectly and thus are also related to a banking crisis. The instability of the banking sector can be influenced both in the short and long run. For instance, the CB's timely and efficient response (bail out or not) to insolvent banks not only prevents the instability at present but also prevents the instability in the future by increasing confidence among the depositors, bankers, and other economic agents.However, not all CBs are sufficiently empowered to handle their duties promptly and efficiently. The ultimate influential role of a country's CB depends on the level of autonomy the CB can enjoy from the treasury branch or

We empirically examine by whom the commercial banks should be supervised for the stability of a banking sector. With a cross-sectional dataset from 78 countries and using a logit estimation model, we find that the probability of the instability of a country's banking sector reduces if the commercial banks are supervised exclusively by the country's central bank. This probability is even higher if the central bank can conduct its supervision in a less-corrupt institutional environment. Finally, by carrying out some counter-factual thought experiments, we confirm that banking supervision causes banking sector instability, not vice versa.

Using a large panel data set, this study analyzes effects of empowering the authority of an explicit deposit insurance scheme (EDIS) on banking crises. Findings suggest that the use of an EDIS increases the probability of a banking crisis. Moreover, this probability is greater if the EDIS is not empowered for the direct intervention in banks' operations-e.g., the power to cancel or revoke banks' deposit insurance contracts, or situations in which deposits are not explicitly covered before a bank failure but are to be covered after the failure. The probability is even greater if the EDIS is used in a less developed country while the scheme is not empowered for the direct intervention in bank operations or uncovered deposits are to be covered ex post to a bank failure.