Handbook of International Banking
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Handbook of International Banking

Edited by Andrew W. Mullineux and Victor Murinde

The Handbook of International Banking provides a clearly accessible source of reference material, covering the main developments that reveal how the internationalization and globalization of banking have developed over recent decades to the present, and analyses the creation of a new global financial architecture.
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Chapter 22: Deposit Insurance and International Banking Regulation

C. Charles Okeahalam


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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