Abstract

Banks are vulnerable to illiquidity and insolvency. Because of banks’ importance to the economy, most governments have chosen to implement a financial safety net to deal with such contingencies. A system of depositor protection that guards the holders of small deposits when their bank fails has in recent years become part of this safety net in a growing number of countries. A well-designed system of deposit insurance can strengthen incentives for good governance for banks (via strong internal governance from owners and managers, firm discipline from the markets, and effective bank supervision bank regulation).

Actual and Good Practices
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