Power of a Deposit Insurance Scheme’s Authority and a Banking Crisis

Abstract

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.

Who should supervise banks for the banking sector stability?

“…We used a set of control variables that are selected from the set of variables used by Detragiache (1999, 2002), Khan and Dewan (2010), Khan and Kazi (2012) and Khan et al (2013) as the determinants of banking crises. The variables are GDP growth rate, depreciation rate, real interest rate, rate of inflation, ratio of M2 to foreign exchange reserves, rate of growth of real domestic credit in the private sector and per capita GDP.…”