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Ill a Survey of Deposit Insurance Practices Ill A Survey of Deposit Insurance Practices recent survey of 85 different systems of deposit The survey, whose results are presented in the Sta- Aprotection found that of the 85, 67 countries of- tistical Appendix tables, will be used to throw some fered an explicit, limited deposit insurance system in light on common practices. Later, the survey will normal times (see Table A1 of the Statistical Appen- also be used to examine the extent to which good dix).46 They are the focus of the survey that follows.47 practices have been adopted, and where they have As Table 2 shows, four of the surveyed countries are been disregarded.50 It finds that countries are in- in Africa, 10 are in Asia, 32 are in Europe, four are in creasingly adopting provisions that temper incentive the Middle East, and 17 are in the Americas. problems, but certain deficiencies remain in some instances. Year of Origin of Limited Deposit Insurance Systems The Deposit Insurance Agency: Role and Responsibilities Although two of the three systems in the United States (one for commercial banks and the second for There are basically two models for the role and re- savings associations) were started in the 1930s, it was sponsibilities of a deposit insurance agency. Under a not until the 1960s that other countries began to adopt narrow construction, the deposit insurance system's the deposit insurance systems that are still in exis- 48 obligation is to pay depositors of failed banks when tence. Eight schemes were initiated in the 1960s, and instructed to do so by the appropriate authority, nine in the 1970s. As the incidence of banking crises which is frequently the bank supervisor, and to ac- escalated in the 1980s, 19 schemes were initiated quire the funds by collecting premiums and building during the decade. Thirty new limited systems com- a fund or by imposing ex post assessments. The de- menced during the 1990s, as banking problems con- posit insurance agency in 34 countries plays such a tinued to escalate on all continents. (See Figure 2). narrow role. The alternative model for the agency is Revisions to deposit insurance systems have been much more comprehensive. The agency takes charge quite common, especially since the European Union of failed banks and resolves them according to the Directive in 1994.49 country's laws. The deposit insurance agency in 33 countries carries a broad range of responsibilities 46 that often includes anticipating bank problems and Seventy-two countries had systems that were explicitly de- resolving failed banks. The narrow construction fined in law and/or regulation. Full coverage was being offered in Spring 2000 in 10 of these countries. In seven of the full-coverage dominates in Europe, but broader responsibilities are cases, comprehensive coverage replaces systems that have limited common in Asia and the Western Hemisphere. scope in normal times. Six African countries that have not fully Moreover, a number of countries have recently ratified their agreement to form a regional insurance system and broadened the role for their agencies or they are con- the system in Panama are excluded from the survey because it ap- sidering enlarging those responsibilities. None is plies the guarantee only to credit cooperatives. Russia is also ex- cluded because of a dearth of information. known to be considering reducing that role. 47The entries in the Tables A1 through A7 of the Statistical Ap- pendix extend and update into the second quarter of 2000 the survey results presented in Garcia (1999), which were exhaustively re- Membership viewed. 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 Table A1 of the Statistical Appendix shows that, to changes have been missed, because changes are frequent at present. avoid the problem of adverse selection, 62 of the 48Some states within the United States began a deposit insur- ance system earlier, as did the former Czechoslovakia. 49In addition to the revisions included in the Statistical Appendix, 50Issues relating to prompt corrective action, failure resolution, the United Kingdom expected to revise its system before long. and speed of depositor compensation were not surveyed. ©International Monetary Fund. Not for Redistribution Ill A SURVEY OF DEPOSIT INSURANCE PRACTICES Table 2. Countries with Explicit, Limited Deposit Insurance Systems Africa Asia Europe Middle East Western Hemisphere (4) (10) (32) (4) (17) Kenya Bangladesh Austria Latvia Bahrain Argentina Nigeria India Belgium Lithuania Lebanon Barbados Tanzania Japan Bulgaria Luxembourg Morocco Brazil Uganda Kazakhstan Croatia Macedonia Oman Canada Korea Czech Rep. Netherlands Chile Marshall Islands Denmark Norway Colombia Micronesia Estonia Poland Dominican Republic Philippines Finland Portugal Ecuador Sri Lanka France Romania El Salvador Taiwan Province of China Germany Slovak Rep. Guatemala Gibraltar Spain Honduras Greece Sweden Jamaica Hungary Switzerland Mexico Iceland Turkey Peru Ireland Ukraine Trinidad & Tobago Italy United Kingdom United States Venezuela Source: Survey results presented in Table A7 of the Statistical Appendix. premiums as an alternative means to combat adverse Figure 2. Decade of Origination of Explicit selection.52 Deposit Insurance Systems While objectives are not investigated by the sur- (Number of Countries) vey, they can sometimes be inferred from deposit in- surance practices. For example, if the objective of the system is primarily to protect small depositors, a 30 country is likely to include all institutions that are li- censed to accept deposits (particularly, small de- 25 posits) from the public. To reduce unfairness to well- 20 supervised institutions, the country makes an effort to oversee all insured institutions to the same strict 15 standards. But, where a country is more interested in maintaining financial stability, it may confine mem- 10 bership to those classes of institution that it consid- ers to have systemic importance. In this case, mem- 5 bership may be focused principally on commercial banks. There may also be subsidiary insurance 0 1930s 1940s 1950s 1960s 1970s 1980s 1990s schemes for smaller, or less systematically important groups of institutions, such as savings associations Source: IMF staff survey. and credit cooperatives. Table A2 of the Statistical Appendix examines these issues and finds that countries typically at- tempt to cover (in one or more insurance system) all systems surveyed are compulsory.51 Nevertheless, institutions that take deposits. Confining coverage to seven schemes are voluntary and three of the volun- licensed commercial banks tends to be the excep- tary schemes (those in the Dominican Republic, Sri tion, not the general rule (column 2, Table A3). Lanka, and Switzerland) do not impose risk-adjusted 52The voluntary system in Sri Lanka began in 1987 by charging 51The sum of the numbers of compulsory and voluntary systems its 13 members a premium of 0.04 percent of deposits. In 1992, exceeds 67 because some countries have more than one deposit the premium was raised to 0.15 percent and two banks withdrew. insurance system. Only seven members currently remain. ©International Monetary Fund. Not for Redistribution Funding the Deposit Insurance System Countries typically require the branches and sub- ment to back up a well-run system of deposit insur- sidiaries of foreign banks that are operating (taking ance that is met by unexpected demands on its re- small deposits) within a country to belong to the sys- sources and is in need of additional funds in order to tem (column 3, Table A2). Countries in the European carry out its responsibilities. Consequently, many Union may relax this requirement somewhat by countries make provisions for the government granting exemptions to foreign institutions that are (preferably, but not always through the ministry of covered by their home system of deposit insurance, finance) to assist a depleted fund with loans. While although they may allow them to join if coverage in 66 of the explicit, limited systems have private fund- the host country's system is more generous than the ing, 55 have access to public funding. Some have al- home scheme. Country authorities typically see their ready received financial help from official sources to responsibility to protect their citizens. Thus, they get the system started or to cope with a systemic typically do not insure the deposits that domestic banking crisis; others expect to obtain it when they banks take offshore (column 4, Table A2). The sur- need assistance (column 3, Table A3). To contain vey noted two exceptions to this general practice. moral hazard among bankers, banks must be re- The first covers countries of the European Union, quired to repay their loans, including those from the which often offer coverage to customers of their government. banks anywhere within the European Union. The The Canadian government goes further in requir- second exception is countries that are particularly ing that the Canada Deposit Insurance Corporation dependent on foreign deposits and fear the impact of (CDIC) pay a "credit enhancement fee" to the gov- their loss on the domestic financial system. ernment when it borrows funds in the private mar- kets. The rationale is that, as a Crown Corporation, the CDIC can borrow at a lower rate than it would if Funding the Deposit Insurance System it were a private corporation. The fee covers the dif- ference. Thus, when the CDIC borrows it pays a pri- Funding for the system of deposit insurance has to vate market rate. be adequate, and has to be seen by the public to be As mentioned in the discussion of good practices, sufficient, if the system is to succeed in compensat- a reticence to commit public funds would be under- ing depositors and maintaining public confidence. standable where a deposit insurance scheme is pri- To this end, there are a number of issues to be ad- vately run because of potential conflicts of interest.
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