Search for other papers by PATRICIA A. MCCOY in
Current site
Google Scholar
Abstract
Deposit insurance is a tightrope act. On the one hand, explicit deposit insurance can significantly reduce the incidence of bank runs or even stop runs altogether in countries with strong institutions and proper safeguards. On the other hand, when not done carefully, explicit deposit insurance can fuel bank crises by giving banks perverse incentives to take unnecessary risks.1 The United States learned a painful lesson in this regard in the 1980s and early 1990s, when an overly generous deposit insurance system helped trigger the largest wave of bank failures there since the Great Depression in the 1930s.2 As the U.S. experience suggests, any country that adopts explicit deposit insurance must grapple with the destabilizing effects of that insurance on the country’s financial system.
International Monetary Fund Copyright © 2010-2021. All Rights Reserved.