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Deposit Insurance: System Design and Implementation Across Countries

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Deposit Insurance: System Design and Implementation Across Countries A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Adema, Joop; Hainz, Christa; Rhode, Carla Article Deposit Insurance: System Design and Implementation Across Countries ifo DICE Report Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Adema, Joop; Hainz, Christa; Rhode, Carla (2019) : Deposit Insurance: System Design and Implementation Across Countries, ifo DICE Report, ISSN 2511-7823, ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München, München, Vol. 17, Iss. 1, pp. 42-51 This Version is available at: http://hdl.handle.net/10419/199058 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu DATABASE DATABASE Joop Adema, Christa Hainz and Association of Deposit Insurers (IADI). This worldwide Figure 2 1 organization for deposit-insuring institutions promotes Carla Rhode Timeline of Number of Countries Adopting Deposit Insurance cooperation and encourages contact among deposit Deposit Insurance: System insurers and other interested parties (IADI 2018a). The Design and Implementation survey participants are the legal entities administrat- 1930‘s 1940‘s 1950‘s 1960‘s 1970‘s 1980‘s 1990‘s 2000‘s 2010‘s ing the DIS, referred to as deposit insurance agencies Across Countries (DIAs). The article is structured into five sections. Firstly, we briefly consider the theoretical literature to under- 2 3 5 8 16 6 1 stand the design features of DISs considered in subse- Soure IDI 201 © ifo Institute quent sections. Secondly, we give an overview of DISs around the world and discuss several essential features INTRODUCTION of DISs in OECD, EU, and BRIC countries. Thereafter, we ance, state-owned and large banks might have a com- ered, the amount covered relative to per capita GDP, consider the mandate and governance structure of parative advantage due to implicit guarantees (Fecht and the coverage of temporary high balances. Deposit insurance systems (DISs) are initiatives aimed DIAs. Subsequently, we discuss the way of financing of and Weber 2019). The presence of deposit insurance Currently, only three of the countries covered in at addressing threats related to the failure of depos- deposit insurance funds (DIFs). And finally, we identify provides a level playing field by increasing the trust in this article do not have a DIS, namely New Zealand, it-taking financial institutions.2 In practice, deposit some recent trends in DISs in the countries considered. private and smaller banks, and increasing competitive Israel, and South Africa. However, in South Africa, the insurance systems guarantee deposits and thus mini- Throughout the article, we emphasize a few important pressure in the banking sector (Ketcha 1999). From the introduction of a DIS has been recently proposed by mize or eliminate the risk that a depositor placing funds themes and examples in the world of deposit insurance. depositor’s perspective, a key argument in favor of DISs the central bank (SARB 2017). In all countries imple- at a financial institution will suffer a loss (Ketcha 1999). is that with their implementation, deposits in checking menting a DIS, several types of financial institutions As such, it is more of a guarantee against a loss than MOTIVES FOR DEPOSIT INSURANCE and savings accounts form a risk-free asset for small (such as commercial or savings banks) are required to insurance (Anginer et al. 2014). In most countries across savers and hence a low threshold for access to banks participate in it.4 The number of insured institutions the world, governments (or private initiatives) have The most predominant argument in favor of deposit and financial products of the formal banking system varies greatly between countries, partially due to large adopted such systems, starting with the United States insurance systems arises from their ability to prevent (Demirgüç-Kunt and Detragiache 2002). differences in country size as well as the concentration in 1933 and continuing up to South Africa, which is bank runs, which usually lead to asset liquidation Nonetheless, DISs come at a cost. When one is of the banking sector. Nine countries employ multiple expected to adopt a DIS within the foreseeable future. and potentially to bank failure. By preventing losses in place, banks’ risk-taking becomes effectively risk- systems, namely Canada, Germany, Italy, Japan, Korea, As this article will point out, DISs around the world for individual depositors, their incentive to withdraw free for depositors. As banks do not have to pay a risk Mexico, Brazil, the US, and Portugal. Except for Canada have different objectives and operate in different ways. deposits before other depositors do so is limited if a premium, they have an incentive to invest in high-risk and Germany, the DISs in the countries differ solely in Demirgüç-Kunt et al. (2014) provide an excellent frame- DIS is in place (Diamond and Dybvig 1983). DISs help to assets. If risky assets fail, the costs are not borne by the subsectors of the financial sector that they cover, work and extensive data for discussing these variations keep the problems of one bank from spreading to the bank depositors, but by all contributors to the deposit with separate DISs for commercial, savings, and coop- across countries (and time). As their most recent data whole sector. As banks are a country’s main source of insurance fund. Furthermore, people usually hold erative banks or credit unions. Canada differentiates is from 2013, the majority of the article will discuss finance, having a stable and well-functioning banking deposits because they want to be able to withdraw geographically, and employs several provincial DISs for data from the most recent survey of the International sector (Anginer et al. 2014) is important for a coun- them very quickly. In cases where deposit insurance trust and loan companies, credit unions, as well as a try’s economic development. Furthermore, in today’s does not provide instant access to the guaranteed national DIS for commercial banks. The German system 1 ifo Institute (all) . 2 Although in terms of deposit insurance “deposit-taking financial insti- world of globally integrated capital markets, a country deposit, it may remain ineffective. Ultimately, deposit of voluntary additional insurance is explained in Box 2. tutions” is the most comprehensive term for the institutions in question, in without a DIS might encounter outflows of deposits insurance might prevent the failure of inefficient banks For all systems, except for Australia, the maximum some sections we refrain from using it in the context of banking crises and supervision, and use “institution” or “bank” instead. (Kleimeier, Sander, and Xu 2019). Without deposit insur- that would otherwise be driven out of business. If there amount covered refers to deposits per institution per is no market discipline by depositors, banking supervi- depositor. In Australia, the main limit refers to a more Figure 1 sion and DISs should be able to discriminate between detailed amount: it covers AUD 162,474 per depositor inefficient and efficient banks (Ketcha 1999). per institution per insured product type (see the prod- Presence of Deposit Insurance Systems Across the World uct types in Table 2). The maximum amount covered in es no DEPOSIT INSURANCE SYSTEM ADOPTION the other countries ranges from EUR 1,303 in India to AND COVERAGE an unlimited amount in Chile and voluntary schemes in Germany. Chile and Germany have unique insurance Worldwide, the majority of countries have adopted structures that are discussed in more depth in Boxes 2 DISs as can be seen in Figure 1. The US and Germany and 5, respectively. To facilitate comparison between were the first to introduce a DIS, in 1933 and 1934, countries that have different levels of income, we report respectively. Larger waves of adoption followed only the maximum limit divided by per capita GDP. It ranges later in the 1960s, 70s, and 80s, and many countries from 0.29 in Iceland to 14.96 in Bulgaria, disregarding implemented a DIS in 1990 (see Figure 2). the schemes in Chile and Germany. The relative cover- Once implemented, DISs differ across countries age for some Eastern European countries is high due to in a few key characteristics. Table 1 gives an overview their – mandatory – participation in the Deposit Guar- of such features for 38 OECD, EU and BRIC countries,3 antee Schemes Directive (DGSD; see Box 1). In addition showing the year of introduction of the first DIS, the to the maximum coverage limit, many countries spec- number of participating institutions, whether there are ify increased coverage for temporary high balances multiple systems in place, the maximum amount cov- in special cases – for example, buying a house with a 3 Country information is provided based on data availability. There is no recent data on Austria, China, Latvia, Slovakia, or Spain; we have included 4 At least one type of financial institution is obliged to take part in the DIS. Soure IDI 2019 © ifo Institute Taiwan in Table 1 in addition to OECD, EU, and BRIC countries.
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