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.