Research Handbook on International Banking and Governance
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Research Handbook on International Banking and Governance

Edited by James R. Barth, Chen Lin and Clas Wihlborg

The contributors – top international scholars from finance, law and business – explore the role of governance, both internal and external, in explaining risk-taking and other aspects of the behavior of financial institutions. Additionally, they discuss market and policy features affecting objectives and quality of governance. The chapters provide in-depth analysis of factors such as: ownership, efficiency and stability; market discipline; compensation and performance; social responsibility; and governance in non-bank financial institutions. Only through this kind of rigorous examination can one hope to implement the financial reforms necessary and sufficient to reduce the likelihood and severity of future crises.
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Chapter 14: Moral Hazard, Bank Resolution and the Protection of Depositors

David G. Mayes


David G. Mayes 14.1 INTRODUCTION Depositor protection is normally organized through one of two schemes. It can take the form of insurance, provided by contributions by the banking system either before or after a bank failure according to rules laid down by the authorities, which normally include compulsory membership.1 In other cases, particularly in Europe, it is provided in the form of a guarantee through a government agency, where the cost is either borne by the taxpayer or recovered from the surviving banks at a later date. In many countries, even under insurance, the scheme is also run by a government agency and, even where it is not, it is usually a government agency that determines when deposit insurance is triggered even if this goes through the courts. In the present crisis, however, governments have taken a much stronger role in protecting deposits and many have offered blanket guarantees. Even where such guarantees have not been offered the coverage of insurance schemes has been raised substantially (IADI, 2010). Previously (IADI-BIS, 2008) deposit insurance was thought to have two main objectives.2 The first was to protect those in society who could not really be expected to assess the risk of their banks and for whom the loss of their deposit would cause serious hardship. The second was to help ensure financial stability. With the rise in coverage it is the second reason that has become dominant and few ordinary depositors can expect to lose anything. However, this reflects a further widely...

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