Edited by Andrew W. Mullineux and Victor Murinde
Chapter 22: Deposit Insurance and International Banking Regulation
C. Charles Okeahalam* 1 INTRODUCTION Deposit insurance is part of the regulatory mechanism in international banking. Countries have diﬀerent types of deposit insurance. It is usual to deﬁne deposit insurance as either implicit or explicit. Implicit deposit insurance is the lender-of-last-resort (LOLR) guarantee which the central bank or regulatory authorities provides to banks and depositors. Under implicit deposit insurance, deposits are protected by the bank monitoring and regulatory authority – which does so without specifying guarantees regarding the extent of the protection. Usually implicit deposit insurance is not speciﬁcally funded. In a country where there is explicit deposit insurance, deposits are protected up to a pre-set limit by the bank monitoring and regulatory authorities. All schemes are designed to provide a mechanism with which the bank regulatory authority can protect deposits in banking institutions. As will be explained in detail below, explicit deposit insurance can be funded publicly or privately or via a combination of public and private funds. There has been extensive debate regarding the usefulness of explicit deposit insurance. Some countries are convinced that their own ﬁnancial system can operate an explicit deposit insurance system. Others are not. This chapter reviews the major aspects of the debate on the utility of deposit insurance in general, but places particular emphasis on the key aspects of explicit (funded) deposit insurance design and policy. Section 2 summarizes the costs and beneﬁts of deposit insurance. Section 3 reviews the literature on deposit insurance with particular emphasis on moral hazard...
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