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Mr. G. G. Johnson
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OP; deposit; insurance system; deposit guarantee; guarantee; country
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Abstract

This paper demonstrates a well-designed deposit guarantee system can strengthen incentives for owners, managers, depositors and other creditors, borrowers, regulators and supervisors, and politicians. Borrowers should be aware that they will have to repay their loans if their bank fails and will be encouraged to keep their loans current where offsetting is limited to past-due loans. The performance of insurers, regulators, and supervisors as agents will improve where they know that they can take justifiable actions without political interference and will be held accountable for their actions to their principals. Despite the improvements, and possibly partly because there are issues in deposit insurance design that remain to be resolved, financial crises have been prevalent during the 1990s. This situation has forced a number of countries to offer a blanket guarantee to restore confidence and to allow the continued functioning of the financial system while the authorities take time to design a plan for the resolution of the crisis.

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Statistical Appendix

Table A1.

Depositor Protection Schemes Explicitly Defined: Membership and Nature of the Deposit Insurance System

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Sources: Information provided by country authorities; and IMF staff. Notes:…Means data are not available.

The format for the establishment of a system of deposit insurance has been adopted by six central African countries that share a central bank (Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon). The treaty that embodies the system has been ratified by Cameroon and Chad. Ratification is pending elsewhere. The scheme will not go into operation until all regional members have ratified the treaty.

Japan has two systems. The first covers, commercial and shinkin banks, which are credit cooperatives, and labor and credit associations but the authorities have extended a temporary full guarantee. The second scheme covers agricultural and fishery cooperatives.

Korea has placed a temporary full guarantee on deposits.

Two U.S. banks in the Marshall Islands are insured by the United Sates’ FDIC under special U.S. legislation, but the domestic bank is not covered.

Banks in Micronesia are insured by the United States’FDIC under special U.S. legislation.

Finland has a relatively new system that replaces its comprehensive guarantee.

France has separate schemes for commercial banks and for mutual, savings and cooperative banks.

Germany has both public and private schemes. There are separate private schemes for commercial banks, savings banks, giro institutions, and credit cooperatives. Since August 1998 there has been in place an official compulsory scheme for commercial banks. The private scheme supplements the public deposit insurance system by covering the 10 percent deductible and topping up coverage. The private deposit insurance system can assist troubled banks.

Until January 2000, Iceland had two schemes for deposit protection-one for commercial banks and the other for savings banks. Both are monitored by the supervisory agency. The two schemes have now been merged.

Italy has two separate schemes, one for commercial banks (that have 90 percent of the system’s deposits) and the other for smaller, mutual institutions.

Norway has two separate deposit insurance funds-one for commercial banks and the other for savings banks..

Poland has three separate schemes.

There are three separate systems in Spain: one for commercial banks, a second for savings banks, and the third for credit cooperatives. They are similar in composition

Before its banking crisis, Sweden did not have a system of depositor protection. It introduced a temporary guarantee of all bank liabilities in 1992, and replaced it with a formal system of deposit insurance to conform to EU standards in January 1996 for all banks and investment firms that receive deposits

Turkey explicitly insures savings deposits and CDs, but in 1994, it extended an implicit guarantee to all deposits.

The legislation setting up the deposit insurance system in Morocco was enacted in 1993; however, the Ministry of Finance was required to approve the by-laws and did not do so until 1996.

In Chile, the central bank guarantees demand deposits. The government guarantees 90 percent of household savings and time deposits to a limit of UF 120 per person per year, that is, 120 inflation-adjusted units of Chilean currency

Article 4 of the Banking Law in Costa Rica states that state-owned banks can count on a guarantee from the government. The public has interpreted this article as providing unlimited deposit protection at state-owned banks.

The Dominican Republic currently has explicit deposit insurance only for savings and loan associations and the National Housing Bank. A law giving wider deposit protection in the form of legal priority passed the legislature in 1999, but was vetoed by the President

A deposit insurance system was enacted in Ecuador in July 1998, but was temporarily over-ridden by a full guarantee that was placed in December 1998. However, deposits were frozen in March 1999 and will be repaid mostly in government bonds as dollarization precludes creating new money.

El Salvador is implementing a new deposit insurance system that covers most deposits.

Jamaica instituted an explicit full guarantee in 1995. A limited deposit insurance system was enacted in March 1998 and began operations in September 1998.

Mexico did not impose an obligation on its insurance agency (FOBAPROA) to guarantee deposits, but each December, the agency announced what instruments it would cover. For example, in 1997, it stated that it would cover all liabilities of commercial banks except subordinated debt. A new law was passed in 1998 under which a new agency, IPAB, insures deposits. The full guarantee is being phased out-a process to be completed by year 2005.

The system in Peru was granted a broad role in the revised legislation of 1999.

The United States has three separate schemes: one for commercial banks, a second for savings associations, and a third for credit unions. Deposits booked offshore are not covered.

Deposit insurance in the United States is compulsory for nationally chartered banks, for state-chartered banks that are members of the Federal Reserve System and for other banks where their state charters require it. In short, federal insurance is compulsory for virtually all bank and thrifts.

The numbers of compulsory and voluntary schemes exceed the total of 68 because Germany has both public and private schemes that are characterized differently.

Table A2.

Membership in Explicit Limited Deposit Insurance Systems

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Sources: Country authorities; and IMF staff. Notes:… Means data are not available.

Excluding the scheme for credit cooperatives in Panama.

Countries in the EEA are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Liechtenstein, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, and the United Kingdom.

In Argentina in 2000, only commercial banks are covered because other banks are excluded because they pay excessively high rates on their deposits.

Table A3.

Private and Official Funding for Explicit Limited Deposit Insurance Systems.

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Sources: Country authorities; and IMF staff. Notes:…Means data are not available.

Excluding the scheme for credit cooperatives in Panama.

Funding reflects the ongoing responsibility to contribute to an insurance fund or to pay ex post assessments in order to compensate depositors of a failed bank. Situations where the government has provided initial funding, has an obligation to supply loans, or has borne losses are also indicated in column 3.

The government should be understood to include the central bank in determining official support for funding.

Resources from the government were needed in Lithuania to fund the system, which was expected to be fully funded from bank premiums starting in 1999.

In Poland, foreign banks retain their premiums until they are needed by the deposit insurance system.

The draft law in Bahrain provides for a fund, with contributions to be shared between the government and the banks.

If the fund proves to be insufficient in Morocco, depositor compensation is reduced pro rata.

The law in Canada does not require the CDIC to accumulate a fund. Instead, it puts aside provisions to cover expected future losses and accumulates them in a reserve (typically called an allowance for loan losses (ALL)). Currently, the CDIC has resources that exceed the ALL.

Table A4.

Building the Fund in an Explicit Limited Deposit Insurance System

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Sources: Country authorities; and IMF staff. Notes:…Means data are not available.

Excluding the six African countries whose deposit insurance system agreement is not fully ratified, and Panama, which has explicit coverage only for credit cooperatives

CAR stands for the capital adequacy ratio. NPLs are non-performing loans. CAMELS stands for capital adequacy, asset quality, management capacity, earnings, liquidity, and systemic risk.

The target in Tanzania is to be raised to this level by June 30, 2001.

The premium in Belgium can be raised by a maximum of 0.04 percent when the funds’ liquid assets fall below a critical level.

The Bulgarian fund can request an advance premium of 1.5 percent of the deposit base if it has insufficient resources.

The premium charged by the private deposit insurance schemes in Germany vary by scheme from 0.004 percent to 0.1 percent.

When the fund reaches a reasonable level in Greece, a bank’s premium is based on the increase in its deposits. The deposit insurance system invests 80% of a bank’s contribution in a time deposit at the bank.

The target in Macedonia is set at 5% and 15% of deposits in different places in the legislation

In the Netherlands, the ex post assessments are made case-by-case on the basis of several items of data recently reported to the central bank. A comparison is made between the portfolios of the failed bank and the assessed bank. Costs are apportioned after consultation with the bankers’ committee.

Article 25 of the deposit insurance law in Poland sets premiums at no more than 0.4 percent of deposits. However, Article 13 states that premiums should not exceed 0.4 percent of the sum of assets rated according to risk. Banks in Poland keep control over their contributions until they are needed, invest in Treasury securities and keep the interest.

Building societies in the Slovak Republic pay premiums at half the commercial banks’ rate. Coverage is adjusted periodically.

In Lebanon, the premium paid by the banks is matched by a contribution from the government.

To reduce central bank exposure, Chilean banks with demand deposits in excess of 2.5 times capital and reserves have to maintain a 100 percent marginal reserve requirement invested in short-term central bank or government securities that are liened to the central bank. The Chilean authorities regard the interest cost of maintaining the reserve requirement as imposing an implicit charge for deposit insurance coverage. The Chilean Central Bank guarantees demand deposits in full. Household savings and time deposits are co-insured 90% by the government to UF 120 (about $3,675) per person per year.

As many of the assets of the insurance fund in Colombia have been lent to weak institutions, the value of the fund’s reserves is overstated.

Premiums in Columbia will become risk-based when a risk-rating agency is established in Colombia, hopefully in the year 2000.

The premium in Peru is computed to the maximum amount insured and applies only to deposits of individuals and nonprofit institutions. Banks pay 0.65 percent of total deposits plus 0.2 percent for each higher risk category.

The U.S. is studying the possibility of revising its process of estimating the risk-adjustment.

The fund, FOGADE, has deferred recognizing the losses it suffered during the 1994–95 banking crisis. Consequently, fund reserves are overstated.

Venezuela raised the premium from 0.5 percent to 2.0 percent early in 1994 to help fund the heavy assistance to troubled banks.

Table A5.

Deposit Coverage in Explicit Limited Deposit Insurance Systems

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Sources: Country authorities; and IMF staff. Notes:… Means data are not available.

Totals exclude six African countries that have agreed upon a regional deposit insurance system, but have yet to ratify the agreement and Panama, which has explicit coverage only for credit cooperatives

Exchange rates are those at the end of October, 1999.

Offsetting refers to the practice of deducting the value of a depositor’s loans or other debts to the bank from his/her insured deposit. Some countries offset (set off, net) the value of all loans from deposits, other set off only past due loans. Yet other countries, such as Argentina, Bahrain, Belgium, France, and Luxembourg that do not offset in general, deduct the value of demand deposits from the value of loans owed.

Coverage in Nigeria is much higher at the official exchange rate than at the market rate.

Japan extended full coverage as an emergency measure and postponed removal from April 2001 until April 2002 in January 2000.

Coverage of the public scheme for commercial banks in Germany is limited to 90 percent and €20,000, but private insurance schemes cover the 10% haircut and cover deposits above the coverage limit. The private schemes for savings banks and credit cooperatives protect deposits by securing the solvency of the institutions as a whole.

Coverage in Iceland in principle is full. The minimum is €20,000. Above that, payment is in proportion to the resources of the fund.

Coverage in Latvia will rise gradually to €20,000 by the year 2008.

The deposit insurance system in Latvia offsets a deposit that is held as collateral for a loan.

The coverage limit in Romania is adjusted each year for inflation.

Coverage in the Slovak Republic is adjusted periodically.

Sweden provided full coverage during the banking crisis in 1992 and withdrew it in 1996.

Turkey has implicitly provided unlimited coverage since May l994. The full guarantee was made explicit in late 1999.

Coverage in the Ukraine will rise as deposit totals trend upwards.

Bahrain covers the lesser of 75 percent of a deposit or $5,610, as long as the fund’s total outlays in any year do not exceed US$9.4 million. In this situation, coverage is determined on a pro rata basis.

Coverage in Canada is extended separately for retirement accounts and deposits held in trust, which are each additionally insured to Can$60,000.

The Chilean Central Bank guarantees demand deposits in full. Household savings and time deposits are co-insured 90% by the government to UF 120 (about $3,400) per person per year.

The coverage limit on Guatemala can be adjusted periodically to cover between 90% and 95% of the number of accounts

Before the legislation passed in 1998, each December in Mexico, FOBAPROA announced which commercial bank obligations it would protect. Coverage is now comprehensive, but there is a legislative proposal to limit coverage in the year 2005 to UDI 400,000 or approximately $96,000, where UDI are inflation-adjusted units of Mexican currency.

In the United States, separate, additional coverage is offered for retirement and joint accounts.

In 1994, Venezuela selectively paid more than the legally stated limit on coverage.

Table A6

Types of Deposit Covered and Excluded in Countries with Limited Explicit Deposit Insurance Systems

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Sources: Country authorities; and IMF staff. Notes:… Information is not available.

Totals exclude six African countries that have agreed upon a regional deposit insurance system, but have yet to ratify the agreement and Panama.

Indicates coverage is extended to deposits in the domestic currency, euros, or the currencies of other members of the EU.

Indicates coverage is extended to deposits in sterling, euros, or the currencies of other members of the European Economic Area (which includes the EU).

Deposits that are denominated in a foreign currency

Frequently refers to deposits that are money-laundered.

Indicates that only individual or household deposits are covered. Sometimes the deposits of small businesses or not-for-profit organizations are also covered.

All domestic-currency deposits in licensed banks in Nigeria are covered except those of directors and staff, as well as deposits that serve as collateral for a loan.

Bangladesh does not insure the deposits of domestic and foreign governments, or financial institution or inter-bank deposits

India insures deposits in commercial, cooperative, and rural banks, except certificates of deposits, government, inter-bank, and illegal deposits

Japan has two deposit insurance systems. The first covers commercial and shinkin banks, and labor and credit associations. It normally insures demand and time deposits in domestic currency, including installment savings and money in trust whose principal has been guaranteed. However, the authorities have extended a temporary full guarantee. The second scheme covers agricultural and fishery cooperatives

Kazakhstan excludes bearer deposits, trust accounts, deposits of individuals engaged in entrepreneurial activity, and insider deposits from coverage

Korea has placed a temporary full guarantee on deposits.

Two U.S. banks are insured by the FDIC, but the domestic bank is not covered

Sri Lanka excludes government, public corporation, and other banks’ deposits from coverage

Taiwan Province of China excludes negotiable CDs, the deposits of governments at all levels and those of financial institutions

Austria excludes government, large corporation, insider and criminal deposits, but insures the deposits of natural persons in full, up to the coverage limit, while coverage for other non-household deposits is limited to 90 percent of the guaranteed deposit

Belgium covers the deposits, bank notes, bonds and other claims on banks of households, and small and medium-sized non-financial enterprises

Bulgaria excludes insider deposits and those paying preferential interest rates.

Croatia excludes foreign currency deposits placed prior to 1993 as they were covered by an issuance of government bonds

Estonia excludes the deposits of insiders, money-launderers, governments at all levels, larger businesses, financial institutions, including insurance companies, other members of the same corporate group, and those that pay substantially higher rates.

In its new system that replaces its comprehensive guarantee, Finland excludes the deposits of the central government and credit institutions

France has separate schemes for commercial banks and for mutual, savings and cooperative banks. Coverage excludes deposits of the central government, insiders, affiliated enterprises, and money-launderers’ deposits, together with the debt securities issued by the insured institution

The statutory scheme in Germany insures all deposits except inter-bank, government, institutional investor, and insider deposits and those that receive exceptionally high interest rates. There are separate private schemes for commercial banks, savings banks, giro institutions, and credit cooperatives. The Deposit Protection Fund established by the Association of German Bankers covers the deposits of non-bank creditors (both resident and non-resident) that are held in Germany and abroad, regardless of currency denomination. It includes insider accounts.

Greece excludes inter-bank, insider, central government, and illegal deposits and negotiable CDs, acceptances, promissory notes and repurchase agreements.

Hungary insures registered deposits but excludes the deposits of the government, insiders, professional investors, and money launderers

Iceland covers all liabilities, except inter-bank and money-laundered deposits, accounts of subsidiaries and parent companies and bonds, bankers’ drafts, and other claims issued by the insured institution in the form of transferable securities

Ireland does not insure certificates of deposit, the deposits of major owners and senior managers, governments at all levels, large corporations, or those involved in money laundering.

Italy insures all deposits except bearer deposits, criminal, government, insider, and inter-bank deposits under two separate deposit insurance systems, one for banks and the other for cooperative institutions

The deposit insurance law in Latvia was enacted in May 1998 and came into effect on October 1, 1998. It does not cover insider deposits or accounts in banks already declared bankrupt or insolvent or that have already entered liquidation proceedings.

The deposit protection scheme in Lithuania excludes anonymous, illegal, and insider deposits and interest.

Macedonia guarantees the current account and savings deposits of resident natural persons that are denominated in dinars and foreign currencies.

The Netherlands excludes the deposits of large corporations, other banks, insurance companies, and insiders, but covers those of small enterprises and small foundations, in addition to those of households

Norway has two separate deposit insurance funds-one for commercial banks and the other for savings banks. Deposits by all financial institutions and other companies in the same group as the member are excluded.

Poland does not guarantee the deposits of a bank’s significant stockholders, its directors, or senior mangers, the deposits of the Treasury, investment firms, or insurance companies. The National Savings Bank-a State Bank, the Polish Guardian Bank, the Food Management Bank and cooperative banks, whose deposits continue to be insured in full by the Treasury through 1999, would, however, pay out at most 0.2 percent of insured deposits. The Treasury also insures some household savings deposits.

Portugal guarantees demand, time, and foreign currency deposits, but not those of insiders or criminals, financial institutions, or central and local governments. The Portuguese law states that “deposits for which the depositor has, on an individual basis, unjustifiably obtained loans from the same credit institution, rate or other financial concessions, which have helped to aggravate its financial situation,” shall be excluded.

The deposit insurance system in Romania protects household deposits and excludes inter-bank, government, insider, and illegal deposits from coverage.

The Slovak Republic does not protect inter-bank, government, or anonymous deposits or those of owners, directors and senior managers.

There are three separate deposit insurance systems in Spain: one for commercial banks, a second for savings banks, and the third for credit cooperatives. The deposits of financial institutions, public bodies, and insiders are not covered.

Before its banking crisis, Sweden did not have a system of depositor protection. It introduced a temporary guarantee of all bank liabilities in 1992, and replaced it with a formal system of deposit insurance to conform to EU standards in January 1996 for all banks and investment firms that receive deposits

Turkey insured savings deposits and CDs denominated in Turkish lira, and also the savings accounts of real persons domiciled in Turkey that are denominated in foreign exchange. In December 1999, a guarantee was extended by decree to all deposits.

Ukraine does not cover the deposits of insiders or their families.

The United Kingdom does not cover the deposits of financial institutions.

Bahrain ensures all deposits held in the Bahraini offices of full commercial banks, except government, illegal, and inter-bank deposits, and those held by affiliates, shareholders, directors and officers of the bank.

Lebanon ensures all deposits denominated in Lebanese pounds, except those of senior insiders, and auditors. Under a transitory law passed in 1991, which initially was due to expire at end 1998, deposits denominated in foreign currency are also insured.

Oman excludes deposits of significant shareholders, directors and senior managers, illegal deposits and the deposits of auditors, parent, subsidiary and affiliated companies.

In Morocco, depositors who have committed a serious crime against the failed institutions are not compensated

In Argentina, inter-bank deposits and deposits that pay more than 200 basis points above the reference rate are not insured.

The Bahamas excludes the deposits of persons who have contributed to the bank’s failure from coverage

Brazil does not insure inter-bank deposits or the deposits of connected parties.

Insured deposits in Canada include: savings and demand deposits; term deposits such as guaranteed investment certificates and debentures issued by loan companies; money orders and drafts and checks; and traveler’s checks issued by member institutions if they are denominated in Canadian dollars

In Chile, the central bank guarantees demand deposits. The government guarantees 90 percent of household savings and time deposits to a limit of UF 120 per person per year, that is, 120 inflation-adjusted units of Chilean currency.

The Dominican Republic has explicit deposit insurance only for savings and loan associations and the National Housing Bank. A provision to give small depositors protection in a wider range of institutions by giving them priority over the assets of a failed bank passed the legislative but was vetoed by the President

Ecuador’s deposit insurance coverage is normally confined to household deposits. It also does not cover the deposits of owners, current or recent directors or managers or deposits that pay more than 3 percent above the average rate. The deposit insurance system covers off-shore deposits

El Salvador is implementing a new deposit insurance system that covers all deposits, including off-shore deposits, but excluding inter-bank and insider deposits.

Coverage in Guatemala does not extend to accumulated interest.

The deposit insurance system in Honduras (FOSEDE) insures demand, savings, and term deposits held by individuals or corporate entities in national or foreign currency. Deposits of other financial institutions, institutional investors, the public sector, members of the same corporate group, insiders, and those who contributed to the insolvency of the failed bank are not eligible for coverage. Neither are deposits that carry significantly higher rates or are illegal.

The Jamaica Deposit Insurance Corporation pays foreign currency deposits in Jamaican dollars, and does not cover inter-bank deposits.

Under FOBAPROA, Mexico did not explicitly impose an obligation on its insurance agency to guarantee deposits, but each December, the agency announced what instruments it would cover. For example, in 1997, it stated that it would cover all liabilities of commercial banks except subordinated debt. Also excluded were illicit transactions, inter-bank credits through the Bank of Mexico’s transfer systems, and obligations of intermediaries that were part of the bank’s financial group. Under the new deposit insurance system established in 1998 (IPAB), there are normally new exclusions that are temporarily overridden by the full guarantee

Peru ensures all types of deposits, except bearer certificates, for natural persons and nonprofit organizations. The deposit insurance system also insures demand deposits for companies and corporations

Trinidad and Tobago insures demand, savings, and time deposits, but not inter-bank or foreign currency deposits, or those of affiliated companies.

Deposit insurance in the United States is compulsory for nationally chartered and for almost all state-chartered banks and thrifts. Deposits booked off-shore are not covered.

Table A7

Effective Coverage in Selected Countries

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Notes: … Means data are not available.

Forty-one countries provided information in response to a special request for data or in published reports.

Countries offset loans (in some cases, all loans, and in other cases, only past-due loans against insured deposits

The value of deposits covered by insurance declined after Italy lowered its coverage limits

The percentages of the number of deposits covered by Spain’s three schemes are: 94,94, and 93 percent

The percentages of the value of deposits covered by Spain’s three schemes are: 53,61, and 63 percent.

Austria, Gibraltar, Greece, Ireland, and Portugal follow EU law by requiring payment to be made within 3 months, unless an exceptional extension of another 3 months, is granted. Sweden aims to pay in less than 3 months

Table A8.

Administering the Deposit Insurance System

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Sources: Country authorities; and IMF staff. Notes:… Means data are not available.

Excluding the six African countries all of which have not ratified the agreement for a regional system of deposit insurance and Panama.

Reflects situations where the government, which is understood to include the central bank, has provided initial funding, has an obligation to supply loans or guarantees, or has borne losses.

Is administered by a public body

In Croatia, the system is administered by a private agency, but some decisions must be approved by the central bank.

In Denmark, the deposit insurance system is privately run although the board is appointed by the government

The private system of deposit insurance in Germany is run by a commission of 10 persons that represent groups of commercial banks. It has no public oversight. The banking supervisor and private deposit insurance system cooperate

Although the scheme is privately run in Italy, all decisions must be approved by the central bank so the deposit insurance system has little independent authority

Norway has two schemes. Both are privately run, but each has two public members of its seven-member board—one from the central bank and the other from the Banking and Securities Commission

The U.K. Deposit Protection Board is a statutory body established under the Banking Act. The U.K. system has been characterized as privately run, but this is inappropriate.

The seven-member deposit insurance board in Venezuela includes four government appointees, one representative from the banks, one from the labor union, and one from the insurance agency’s employees.

Recent Occasional Papers of the International Monetary Fund

197. Deposit Insurance: Actual and Good Practices, by Gillian G.H. Garcia. 2000.

196. Trade and Trade Policies in Eastern and Southern Africa, by a staff team led by Arvind Subramanian, with Enrique Gelbard, Richard Harmsen, Katrin Elborgh-Woytek, and Piroska Nagy. 2000.

195. The Eastern Caribbean Currency Union—Institutions, Performance, and Policy Issues, by Frits van Beek, José Roberto Rosales, Mayra Zermeño Ruby Randall, and Jorge Shepherd. 2000.

194. Fiscal and Macroeconomic Impact of Privatization, by Jeffrey Davis, Rolando Ossowski, Thomas Richardson, and Steven Barnett. 2000.

193. Exchange Rate Regimes in an Increasingly Integrated World Economy, by Michael Mussa, Paul Masson, Alexander Swoboda, Esteban Jadresic, Paolo Mauro, and Andy Berg. 2000.

192. Macroprudential Indicators of Financial System Soundness, by a staff team led by Owen Evans, Alfredo M. Leone, Mahinder Gill, and Paul Hilbers. 2000.

191. Social Issues in IMF-Supported Programs, by Sanjeev Gupta, Louis Dicks-Mireaux, Ritha Khemani, Calvin McDonald, and Marijn Verhoeven. 2000.

190. Capital Controls: Country Experiences with Their Use and Liberalization, by Akira Ariyoshi, Karl Haber-meier, Bernard Laurens, Inci ötker-Robe, Jorge Iván Canales Kriljenko, and Andrei Kirilenko. 2000.

189. Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union, by Donal McGettigan. 2000.

188. Financial Sector Crisis and Restructuring: Lessons from Asia, by Carl-Johan Lindgren, Tomás J.T, Baliño. Charles Enoch, Anne-Marie Guide, Marc Quintyn, and Leslie Teo. 1999.

187. Philippines: Toward Sustainable and Rapid Growth. Recent Developments and the Agenda Ahead, by Markus Rodlauer, Prakash Loungani, Vivek Arora, Charalambos Chrisiofidcs. Enrique G. De la Piedra, Piyabha Kongsamut, Kristina Kostial, Victoria Summers, and Athanasios Vamvakidis. 2000.

186. Anticipating Balance of Payments Crises: The Role of Early Warning Systems, by Andrew Berg, Eduardo Borensztein. Gian Maria Milesi-Ferretti, and Catherine Pattillo. 1999.

185. Oman Beyond the Oil Horizon: Policies Toward Sustainable Growth, edited by Ahsan Mansur and Volker Treichel. 1999.

184. Growth Experience in Transition Countries, 1990–98. by Oleh Havrylyshyn, Thomas Wolf, Julian Beren-gaut, Marta Castello-Branco, Ron van Rooden, and Valerie Mercer-Blackman. 1999.

183. Economic Reforms in Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan, by Emine Giirgen, Harry Snoek, Jon Craig, Jimmy McHugh, Ivailo Izvorski, and Ron van Rooden. 1999.

182. Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union, by a Staff Team Led by Liam Ebrill and Oleh Havrylyshyn. 1999.

181. The Netherlands: Transforming a Market Economy, by C. Maxwell Watson, Bas B. Bakker, Jan Kees Martijn, and Ioannis Halikias. 1999.

180. Revenue Implications of Trade Liberalization, by Liam Ebrill, Janet Stotsky, and Reint Gropp. 1999.

179. Disinflation in Transition: 1993–97, by Carlo Cottarelli and Peter Doyle. 1999.

178. IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment, by Timothy Lane. Atish Ghosh, Javier Hamann, Steven Phillips, Marianne Schulze-Ghattas, and Tsidi Tsikata. 1999.

177. Perspectives on Regional Unemployment in Europe, by Paolo Mauro, Eswar Prasad, and Antonio Spilim-bergo. 1999.

176. Back to the Future: Postwar Reconstruction and Stabilization in Lebanon, edited by Sena Eken and Thomas Helbling. 1999.

175. Macroeconomic Developments in the Baltics, Russia, and Other Countries of the Former Soviet Union, 1992–97, by Luis M. Valdivieso. 1998.

174. Impact of EMU on Selected Non-European Union Countries, by R. Feldman, K. Nashashibi, R. Nord, P. Allum, D. Desruelle, K. Enders, R. Kahn, and H. Temprano-Arroyo. 1998.

173. The Baltic Countries: From Economic Stabilization to EU Accession, by Julian Berengaul, Augusto Lopez-Claros, Francoise Le Gall, Dennis Jones, Richard Stern, Ann-Margret VVestin, Effie Psalida, Pietro Garibaldi. 1998.

172. Capital Account Liberalization: Theoretical and Practical Aspects, by a staff team led by Barry Eichen-green and Michael Mussa, with Giovanni Dell’Ariccia, Enrica Detragiache, Gian Maria Milesi-Ferreiti, and Andrew Tweedie. 1998.

171. Monetary Policy in Dollarized Economies, by Tomás Baliño, Adam Bennett, and Eduardo Borensztein. 1998.

170. The West African Economic and Monetary Union: Recent Developments and Policy Issues, by a staff team led by Ernesto Hernández-Catá and comprising Christian A. François, Paul Masson, Pascal Bou-vier, Patrick Peroz, Dominique Desruelle, and Athanasios Vamvakidis. 1998.

169. Financial Sector Development in Sub-Saharan African Countries, by Hassanali Mehran, Piero Ugolini, Jean Phillipe Briffaux, George Iden, Tonny Lybek, Stephen Swaray, and Peter Hayward. 1998.

168. Exit Strategies: Policy Options for Countries Seeking Greater Exchange Rate Flexibility, by a staff team led by Barry Fichengreen and Paul Masson with Hugh Bredeukamp, Barry Johnston, Javier Hamann, Esteban Jadresic, and Inci Otker. 1998.

167. Exchange Rate Assessment: Extensions of the Macroeconomic Balance Approach, edited by Peter Isard and Hamid Faruqee. 1998

166. Hedge Funds and Financial Market Dynamics, by a staff team led by Barry Eichengreen and Donald Mathieson with Bankim Chadha, Anne Jansen, Laura Kodres, and Sunil Sharma. 1998.

165. Algeria: Stabilization and Transition to the Market, by Karim Nashashibi, Patricia Alonso-Gamo, Stefania Bazzoni, Alain Féler, Nicole Laframboise, and Sebastian Paris Horvitz. 1998.

164. MULTIMOD Mark III: The Core Dynamic and Steady-State Model, by Douglas Laxton, Peter Isard, Hamid Faruqee, Eswar Prasad, and Bart Turtelboom. 1998.

163. Egypt: Beyond Stabilization. Toward a Dynamic Market Economy, by a staff team led by Howard Handy. 1998.

162. Fiscal Policy Rules, by George Kopits and Steven Symansky. 1998.

161. The Nordic Banking Crises: Pitfalls in Financial Liberalization? by Burkhard Dress and Ceyla Pazarbasioglu. 1998.

160. Fiscal Reform in Low-Income Countries: Experience Under IMF-Supported Programs, by a staff team led by George T. Abed and comprising Liam Ebrill, Sanjeev Gupta, Benedict Clements, Ronald Mc-Monran, Anthony Pellechio, Jerald Schiff, and Marijn Verhoeven. 1998.

159. Hungary: Economic Policies for Sustainable Growth, Carlo Cottarelli, Thomas Krueger, Reza Moghadam, Perry Perone, Edgardo Ruggiero, and Rachel van Elkan. 1998.

158. Transparency in Government Operations, by George Kopits and Jon Craig. 1998.

157. Central Bank Reforms in the Baltics, Russia, and the Other Countries of the Former Soviet Union, by a staff team led by Malcolm Knight and comprising Susana Almuina, John Dalton, Inci Otker, Ceyla Pazarbaşioğlu, Arne B, Petersen, Peter Quirk, Nicholas M. Roberts, Gabriel Sensenbrenner, and Jan Willem van der Vossen. 1997.

156. The ESAF at Ten Years: Economic Adjustment and Reform in Low-Income Countries, by the staff of the International Monetary Fund. 1997.

155. Fiscal Policy Issues During the Transition in Russia, by Augusto Lopez-Claros and Sergei V. Alexas-henko.1998.

154. Credibility Without Rules? Monetary Frameworks in the Post-Bretton Woods Era, by Carlo Cottarelli and Curzio Giannini. 1997.

153. Pension Regimes and Saving, by G.A. Mackenzie. Philip Gerson, and Alfredo Cuevas. 1997.

Note: For information on the title and availability of Occasional Papers not listed, please consult the IMF Publications Catalog or contact IMF Publication Services.

1

Moral hazard occurs when protection causes the beneficiaries of insurance (in the case of deposit insurance. This means depositors, bank owners, managers and supervisors, and even politicians) to be careless in their approach to bank soundness. Adverse selection occurs when only the worst risks seek to take advantage of protection, resulting in a financially nonviable system. Agency problems occur when the agent does not execute the desires/commands of his/her principal. In deposit insurance, the problem occurs principally when supervisors and regulators put the interests of the industry they regulate above those of the general population (“regulatory capture”) and when politicians interfere in the supervisor’s performance of his/her public responsibilities, often at the taxpayer’s expense.

2

Sections II and III discuss systems of limited deposit insurance suitable for normal times. Section IV pertains to full (blanket) coverage offered during a systemic crisis.

3

Many in the European Union and Eastern Europe did so to conform with the European Union’s 1994 Directive on Deposit Guarantee Schemes.

4

The Bank Insurance Fund in die United States successfully resolved 1,394 failed banks between 1984 and 1992. The assets of these failed banks represented 10 percent of all insured bank assets in 1984 and 6.6 percent in 1992

5

For a definition of the term, “deposit.” and a discussion of the characteristics of depository institutions that make them candidates for protection, sec Garcia (1996). which also discusses other objectives for deposit protection, including increasing competition and promoting economic growth, that countries sometimes harbor for their insurance system.

6

The government in Argentina has attempted to overcome the problem of a privately run deposit insurance system setting low premiums by establishing a legal target size for the system’s fund.

7

An intervened bank is one that has deteriorated so far that the supervisors take control temporarily or permanently from its owners and managers.

8

The deposit insurance systems of Argentina in 1982 and Venezuela in 1994 did not pay insured deposits promptly. This omission had severe repercussions on depositor confidence.

9

While the Federal Deposit Insurance Corporation (FDIC) was successful in handling the large number of bank failures that occurred in the late 1980s and early 1990s in the United States, the Federal Savings and Loan Insurance Corporation (FSL1C) was not. It was abolished and a temporary agency, the Resolution Trust Corporation (1989–1995), was created to handle a similarly large number of failed thrift institutions.

10

Realistic loan valuation requires effective regulation and supervision of loan classification and provisioning.

11

See Benston and Kaufman 1988 for an early exposition of prompt corrective actions/SEIR.

12

U.S. law, for example, requires supervisors to intervene and pass the troubled bank to the FDIC, when its leverage ratio falls below 2 percent.

13

See, for example. The Board of Governors of the Federal Reserve 1999) and Lang and Robertson (2000).

14

The legal system of some countries allows losses to be imposed on subordinate debt holders without permanently closing and liquidating the banks by passing The failed bank quickly through receivership.

15

The Gramm-Reaeh-Bliley Act requires large U.S. banks to issue long-term, unsecured debt if these banks control a financial subsidiary.

16

What constitutes a bank that is “too big to fail” cannot be established universally but needs to reflect the specific features of each banking system (e.g.. the size of interbank and other large credit exposures, the number of viable surviving banks able to provide needed services, etc.) and the economy.

17

For example, systems of private deposit insurance in five U.S. states defaulted in the late 1980s and early 1990s and caused major distress to depositors in these regions when one of the two largest members of the deposit insurance system failed (English, 1993).

18

Although there may not be a large number of competitors in a contestable system, it can experience the advantages of competition. The fact that new banks can join the industry makes existing banks act competitively.

19

The defining characteristic of a deposit is that it has a fixed principal. See Garcia (1996) for a discussion of the characteristics Of a deposit and why offering deposits makes banks vulnerable 10 insolvency and is liquidity.

20

Country practices in this regard are detailed in Table A5 of the Statistical Appendix. The table reveals that it is indeed feasible to compensate a high percentage of the number of depositors and a low percentage of the value of deposits, because most deposits are small.

21

Some countries impose haircuts on a sliding scale, but this can violate the principle that simplicity, transparency, and public trust go hand-in-hand.

22

A cross-default clause, often used by payment clearing houses and interbank contracts, automatically invokes netting under specified conditions.

23

As, for example, in Sections 53–55 of the Bankruptcy Code Of the Netherlands and the FDIC’s Manual on Band Liquidation in the United States.

24

It would he counterproductive to protect a depositor with inside information who has taken out a loan just before the bank fails.

25

The EU Directive sets rules governing coverage from other EU countries.

26

The Bank Insurance Fund in the United States introduced risk-based premiums in 1992 and subsequently increased the premium range to stretch from zero basis points for the strongest banks (judged on the basis of their capital ratios and supervisory ratings) to 27 basis points for the weakest banks. It is currently considering a new system to give greater actuarial accuracy.

27

Under the CAMELS system, banks are rated on a scale from one to five according to a composite of the capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to systemic risk.

28

The basis for risk-assessment is discussed further in the survey in Section III and Table A4 of the Statistical Appendix.

29

Nevertheless, us discussed later, some privately ran systems are operating successfully.

30

The central bank’s multiple role may involve it in conflicts of interest, so countries with enough resources sometimes choose to spread the roles among different agencies.

31

The United States found that excessive lender-of-last-resort lending had been a problem in the 1980s. It responded to this problem in legislation passed in 1991 that limited the ability of the Federal Reserve to lend to insolvent banks even against first rate collateral. See the Congressional Report accompanying the passage of the FDIC Improvement Act of 1991.

32

Financial sufficiency is also important and is discussed in the following section.

33

Some countries, such as Argentina, Germany, and Peru, have successful, privately run deposit insurance systems. Privately run systems typically have a narrow mandate. Access to financial support from the government can be especially denied in order to avoid public/private conflicts of interest.

34

Nevertheless, a number of countries have successful privately run deposit insurance systems that do have bankers on the board. Obtaining confidential information remains a problem to be overcome for privately run deposit insurance system, as docs providing government financial support.

35

U.S. congressional staff found that 90 percent of the extended credit granted by the U.S. Federal Reserve as lender of last resort went to banks that subsequently failed (U.S. House of Representatives, 1991, p, 94).

36

Members of parliament or people currently employed in the industry should be ineligible.

37

Having the deposit insurance system board report to the central bank or supervisory host is an alternative way to achieve independence, but it does so at the expense of accountability to the public.

38

The Bank Insurance Fund started in the United States after the banking system had been restructured by the Reconstruction Finance Corporation during the Great Depression. After accumulating a fund of $18 billion (or 1.25 percent of insured deposits) over the intervening years, the fund became illiquid, but not insolvent, in 19° I when faced by a large number of bank failures.

39

Ex post assessments tend to be chosen by privately financed and privately operated deposit insurance scheme.

40

Failure of a country’s largest banks would he a systemic failure, as discussed in Section III.

41

Venezuela’s deposit insurance reserves were invested heavily in insolvent banks, whereas they should have been invested in safe assets that can be easily liquidated in case of a need. This typically means investing in government securities at home or abroad Small countries, in particular, may wish to diversify by investing Fund resources in easily marketable securities> issued by foreign governments to keep the fund liquid and protect its value against high rates of inflation. Investing in foreign government securities would give some protection against foreign exchange losses in highly dollarized economic.

42

Funds raised in the national debt markets are monetarily neutral, which is important where bank solvency is a problem.

43

Central banks typically have very little capital and DO power to tax: therefore, all too frequently, the only way to cover any losses they incur is to print money. From a fiscal perspective, the accounts of the central bank and the government should be consolidated; although the budget effects of lender-of-last-resort and deposit insurance system losses are often hidden as “quasi-fiscal” losses at the central bank.

44

Having a currency board forced Argentina to use alternative means to support illiquid banks.

45

While a discussion of viable and nonviable banks is beyond the scope of this paper, a liable bank is one that has enough earning assets in relation to liabilities to be profitable enough to rebuild capital to acceptable levels over a short time (two to three-year) horizon. See Lindgren. Garcia, and Saal (1996).

46

Seventy-two countries had systems that were explicitly defined in law and/or regulation. Full coverage was being offered in Spring 2000 in 10 of these countries. In seven of the full-coverage cases, comprehensive coverage replaces systems that have limited scope in normal times, Six African countries that have not fully ratified their agreement to form a regional insurance system and die system in Panama are excluded from the survey because it applies the guarantee only to credit cooperatives. Russia is also excluded because of a dearth of information.

47

The entries in the Tables Al through A7 of the Statistical Appendix extend and update into the second quarter of 2000 the survey results presented in Garcia 1999), which were exhaustively reviewed. Every effort has been made to include new schemes in the tables and to reflect revisions that have been made to existing schemes. The author requests the reader’s forgiveness if any changes have been missed, because changes are frequent al present.

48

Some states within the United States began a deposit insurance system earlier, as did the former Czechoslovakia.

49

In addition to the revisions included in the Statistical Appendix, the United Kingdom expected to revise its system before long.

50

Issues relating to prompt corrective action, failure resolution, and speed of depositor compensation were not surveyed.

51

The sum of the numbers of compulsory and voluntary systems exceeds 67 because some countries have more than one deposit insurance system.

52

The voluntary system in Sri Lanka began in 1987 by charging its 13 members a premium of 0.04 percent of deposits. In 1992, the premium was raised to 0.15 percent and two banks withdrew. Only seven members currently remain.

53

The best known example of an insolvent insurance scheme is perhaps the Federal Savings and Loan Insurance Corporation in the United States, which practiced forbearance for a number of years with costly consequences for U.S. taxpayers.

54

The author is grateful to Charles Siegman for this insight.

55

Initially, a number of the ex post schemes were voluntary, but by the end of the twentieth century all were compulsory. All but one (Bahrain) of the nine ex post systems are located in Europe and all but two of the European ex post insurance systems (Gibraltar and Switzerland) belong to countries that arc members of the European Union. The EU Directive on Deposit Guarantee Schemes requires member countries to offer compulsory deposit insurance. Consequently, two member countries (Germany and Italy) with ex post schemes that were previously voluntary now offer compulsory systems of deposit insurance. In addition. France switched from a voluntary, ex post system to a compulsory funded scheme in mid–1999, As a result, today, both funded and ex post schemes are now typically mandatory.

56

Among countries granting full guarantee (Costa Rica—for state-owned banks, Ecuador, Honduras, Indonesia, Japan, Korea, Malaysia, Mexico, Thailand, and Turkey), Ecuador, Malaysia, Mexico, and Turkey had previously granted depositors priority

57

Countries, such as the United States, set a high level when it raised coverage in 1981 and had to wait for inflation and the growth of GDP to reduce the coverage ratio to more incentive-compatible levels. The $100,000 limit set by the United States in 1980 was virtually nine times per capita GDP at that time. It has taken 19 years to reduce the coverage ratio to the current more incentive-compatible level of three times 1999 GDP. The excessively high coverage contributed to the S’L crisis in the 1980s, (See Garcia and Plautz. 1988, pages 257—279)

58

If The banking industry is very weak, a deposit insurance scheme may not be feasible until it has been restructured.

59

By law, the Federal Deposit Insurance Corporation in the Uniteded States does not impose premiums on the highest quality banks when its fund is above Us statutory larger level of 1.25 percent of insured deposits, as it is in the year 2000.

60

For example, a deposit insurance scheme may have made a financial assistance loan to a very weak bank that may not be repaid but allows the bank to keep operating. The system may not have made provision for the losses expected on this loan.

61

The current proposal by the Basel Committee on Banking Supervision to allow supervisors to set institution-specific capital adequacy ratios would make it more difficult for the public to discover its supervisory rating.

62

Poland also uses risk-based assets to provide an upper bound on premiums that are, in practice, determined as a percentage of total deposits.

63

Each of these systems is compulsory despite the risk-adjusted premiums

64

Jamaica recently ended its full coverage.

65

The U.S. Federal Deposit Insurance Corporation (FDIC) and the Canada Deposit Insurance Corporation (CD1C) each have computer programs into which they feed a failed institution’s data to identify insured depositors and the amounts owed to them. The fewer the exclusions from coverage, the more effective are these programs. Lacking exclusions, the FDIC typically compensates depositors within three days

66

As discussed in footnote I. agency problems involve a lack of coincidence between the principal in a transaction and the party acting as the agent for its execution.

67

While the regional scheme agreed to in Africa in 1999 would be voluntary, the signatories attempted to combat adverse selection by proposing to risk adjust premiums.

68

€20,000 is 0.4 times per capita GDP in Luxembourg, which had the highest per capita GDP in the European L’liion in 1998, but more than twice per capita GDP in Portugal.

70

Distress bidding for deposits occurs where a problem bank dial would become illiquid bids up deposit rates in order to attract funds.

71

The best example of this is the United States where, even after 51) years of accumulating funds, widespread failures of savings and loan associations (S’Ls) bankrupted the S’L insurance fund.

72

Converting deposits to equity will assist solvency. Converting short-term deposits to a longer term will help liquidity, but not solvency, unless the nominal value of deposits is also written down. See Baer and Klingebiel (1995) for examples of countries that have adopted these techniques.

73

See Folkens-Landau, Lindgren, and others (1998, pp. 28–30). But in crisis situations, including those that disrupt the payment system, the government will need to take some of the financial responsibility and do what it should have done before—strengthen the financial system so that it will be more able to withstand shocks and not propagate or spread them. This strengthening should include preparing concomitant reforms to minimize immediate losses in the payment system, and eliminate future losses in the banking system.

74

Argentina did not issue an explicit guarantee although the banking system’s deposits declined by IS percent in The early months of 1995. Some depositors lost money at this time and a few small banks were closed Nevertheless, beginning in March 1995, the authorities implicitly extended a 100 percent guarantee to bank deposits, while avoiding formal violation of the currency hoard arrangement. It did so by the central bank providing all the liquidity that banks suffering withdrawals needed, so that any depositor who wished to do so could withdraw his deposits, thus fully protecting depositors. The central bank provided liquidity by reducing reserve requirements across the board and by graining rediscounts to the largest state-owned bank, which, in turn, provided liquidity to the rest of the system.

75

Sweden, Finland, and Jamaica have already scaled down their coverage to that more typical of a limited deposit insurance guarantee, and the other crisis countries are preparing to do so.

76

Depositors and/or creditors incurred losses in Argentina in 1989–90. Brazil in 1994–96. Chile in 1982–84. Cöle d’lvoire in 1991. Estonia in 1992. Latvia in 1995. Malaysia in 1986–88. Thailand in 1983–87 and in 1997. and the United States since 1991. See “Systemic Bank Restructuring and Macroeconomic Policy” (Table 2). Moreover, depositors at some, but not all failed banks, incurred losses in the Venezuelan crisis of 1994–95.

77

Korea, Malaysia, and Thailand, for example, included commercial banks, finance companies, and merchant banks in their guarantees (see Lindgren and others, 2000).

78

Korea and Malaysia also included the overseas branches of domestic banking institutions in its guarantee. Some countries, such as Mexico and Korea, have extended coverage beyond depository institutions to insurance companies and brokerage houses, but not Korea’s investment trust companies or leasing companies. Korea excluded repurchase agreements after July 1998, however, as a beginning to phasing out its full guarantee.

79

In Indonesia, insider deposits were not covered by the guarantee (likewise in Thailand) unless claimants could prove that the transactions had been made at “arm’s length.”

80

At least in the case of Thailand, losses can be imposed only when the bank is liquidated and not if it is intervened or reorganized with new shareholders.

81

In Thailand, for example, foreign creditors rather than domestic depositors and creditors ran, even with a government guarantee in place, Sweden’s full guarantee was, on the other hand, successful in stemming die flight of foreign capital. In Indonesia, both domestic depositors and foreign creditors ran. Korea negotiated a separate debt agreement with its foreign creditors that imposed losses on them. Evidently the guarantee was most credible in Sweden and least credible in Indonesia. A question arises regarding the reasons for these disparities in experience. Future research may determine the reasons for the differences in credibility.

82

The guarantee would compensate The central bank for any resulting losses it incurs by reducing the central bank’s remission of profits to the government or by providing additional capital, if necessary.

83

Chile is the only country where the central bank provides a full guarantee for banks’ demand deposits in addition to limited government coverage for household savings and time deposits. The quid pro quo for this guarantee is a 100 percent marginal reserve requirement on insured deposits when they exceed 2511 percent of a bank’s capital. Thus, this scheme reduces moral hazard by limiting banks’ ability to acquire risky assets. At the margin, this arrangement approximates the concept of a narrow bank where all deposits are safely invested in government or other liquid securities

84

Indonesia, Japan, Korea, Mexico, and Thailand have announced that their full guarantee will be replaced by a limited system of deposit protection.

85

Indonesia and Thailand capped rates at margins above those paid by the best banks to prevent aggressive bidding to: deposits.

86

Indonesia and Thailand imposed an additional fee for The comprehensive guarantee. Members of the deposit insurance system in Japan, Korea, and Mexico continue to pay premiums to their insurance fund while benefiting from the full guarantee.

87

Not everyone favors replacing a full guarantee with limited deposit protection, however, Some argue that some countries have limited political capital available for dealing firmly with weak and failed banks and that what is available should be expended on isolating a small group of bank creditors (subordinated debt holders, in particular) as the only ones to stand at risk and monitor bank condition. Professor Charles Calomiris, for example, argues that, in practice, most creditors are protected, even in systems that have limited protection in place. Protection is effected by resolving failed banks by a purchase and assumption transaction that transfers all of a failed bank’s debts to the acquiring bank. Thus, protection is limited in law, but not in practice. However, lessons learned from past crises are contesting Professor Calomiris’ assertion of full protection.

88

Professor Edward Kane succinctly states that the time to pull the guarantee is when its present value to the banks is minimal and the authorities have put in place provisions to control the public sector’s exposure to the losses that banks incur.

89

Malaysia and Thailand have set no such deadlines. Mexico, Korea, and Japan have set target dates that have been, or may have to be, adjusted as the deadline approaches.

90

Some analysts believe that setting a (realistic) date for removal is essential to drive needed reforms, and that waiting for the right time will delay action too long.

91

Savings banks are guaranteed, for example, in the countries of the Commonwealth of Independent States and Sri Lanka.

92

The full guarantee of household savings deposits made before 1993 is still in place in Hungary, although it now applies only to a minor amount of deposits. Deposits placed after 1993 have limited coverage.

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Cover Deposit Insurance
Deposit Insurance
Actual and Good Practices
ISBN:
9781557759481
ISSN:
0251-6365
Publication Date:
01 Jan 2000
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557759481.084
Pages:
98

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