- David Hoelscher, Michael Taylor, and Ulrich Klueh
- Published Date:
- December 2006
The Design and Implementation of Deposit Insurance Systems
David S. Hoelscher, Michael Taylor, and Ulrich H. Klueh
INTERNATIONAL MONETARY FUND
© 2006 International Monetary Fund
Production: IMF Multimedia Services Division
Typesetting: Bob Lunsford
Figures: Jason Soleil
Hoelscher, David S.
The design and implementation of deposit insurance systems / David S. Hoelscher, Michael Taylor, and Ulrich H. Klueh—[Washington, D.C. : International Monetary Fund, 2006]
p. cm.—(Occasional paper ; 251)
Includes bibliographical references.
1. Deposit insurance. 2. Moral hazard. I. Taylor, Michael (Michael W.), 1962– II. Klueh, Ulrich. II. Series: Occasional paper (International Monetary Fund) ; no. 251
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Statistical Appendix Tables
The following conventions are used in this publication:
In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
An en dash (–) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Countries are modifying their deposit insurance systems at a rapid pace as lessons are learned about the possible limitations of deposit insurance and the effectiveness of design features. Considerable changes were introduced by the transition economies in Central and Eastern Europe in the early and mid-1990s. Lessons from that experience were summarized in a number of IMF publications surveying country practices, which were shared with the membership at large.1 By the mid- and late 1990s, a significant number of countries had introduced deposit protection systems as a means of stabilizing their banking systems and protecting depositors from loss. The IMF assisted in the design of such systems but cautioned about too rapid an introduction, suggesting that appropriate political, institutional, and economic preconditions needed to be in place before deposit protection could be effective. By 2000, the IMF reviewed this experience and identified “good international practices” that were emerging from the country experience.2
Together with the rapid growth in the number of deposit insurance systems, academic papers raised a series of concerns about the appropriate design of safety nets in general and deposit insurance systems in particular. Issues concerned the incentive structures of deposit insurance systems and the possibility of linkages between deposit insurance design and financial sector vulnerabilities.
This paper reviews recent developments in the design of deposit insurance systems and offers a summary of the academic literature. As in the past, the IMF’s work on deposit insurance argues against the development of “best practices” applicable to all systems but, rather, stresses the importance of incorporating the authorities’ objectives as well as individual country characteristics when adopting a deposit insurance system to ensure an effective system that minimizes disincentives and distortions to financial sector intermediation.
The authors would like to thank David Parker for his substantial assistance in discussing the design issues and in preparing the text. They would also like to thank members of the European Forum, the International Association of Deposit Insurers, and the World Bank for insightful comments. Administrative assistants Sandra Solares and Aster Teklemariam provided excellent support. The text has also benefited from the editorial expertise of Marina Primorac and Jeffrey Hayden from the External Relations Department, who coordinated its publication.
Allowance for loan lossesCAMELS
Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity (credit worthiness assessment system)CAR
Capital adequacy ratioCD
Certificate of depositCDIC
Canada Deposit Insurance CorporationCEO
Chief Executive OfficerDIA
Deposit insurance agencyDIS
Deposit insurance systemDPB
Deposit Protection Board (Zimbabwe)EEA
European Economic AreaEU
Federal Deposit Insurance AgencyFGD
Fondo de Garantia de Depositos (Paraguay)FOGADE
Fondo de Garantia de Depositos de las Instituciones FinancierasFOSEDE
Fondo de Seguro de DepositosFSA
Financial Services Authority (United Kingdom)FSF
Financial Stability ForumIADI
International Association of Deposit InsurersIDIC
Indonesian Deposit Insurance CorporationMOF
Ministry of FinanceMOU
Memorandum of UnderstandingOECD
Organization for Economic Cooperation and Development