Deposit Insurance and Crisis Management

An Application to the Thai Baht

A well-designed deposit insurance system (DIS) will provide incentives for citizens to keep the financial system sound. However, a poorly designed DIS can foster a financial crisis. This paper, therefore, makes recommendations for creating and running a limited, incentive-compatible, DIS. The paper also examines factors in the decision to grant, temporarily, a comprehensive guarantee, and the design of that guarantee, should a systemic financial crisis nevertheless occur. It concludes with guidance on the removal of that guarantee.
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Volume/Issue: Volume 2000 Issue 057
Publication date: March 2000
ISBN: 9781451847765
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Business and Economics , Banks and Banking , Finance , WP , banking system , insurance fund , financial system , failed bank , Deposit insurance , comprehensive guarantee , adverse selection , financial backing , problem bank , flight to quality , bank loss , franchise value , unguaranteed credit rating , full guarantee , subordinated debt-holder , banking industry , Commercial banks , Bank deposits , Bank resolution , Moral hazard , Global

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Summary

A well-designed deposit insurance system (DIS) will provide incentives for citizens to keep the financial system sound. However, a poorly designed DIS can foster a financial crisis. This paper, therefore, makes recommendations for creating and running a limited, incentive-compatible, DIS. The paper also examines factors in the decision to grant, temporarily, a comprehensive guarantee, and the design of that guarantee, should a systemic financial crisis nevertheless occur. It concludes with guidance on the removal of that guarantee.

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