Modis

Abstract

This paper argues that an optimal deposit insurance scheme would allow the level of insurance coverage to be determined by the market. Based on this principle, the paper proposes an insurance scheme that minimizes distortions and embodies fairness and credibility, two essential characteristics of a viable and effective deposit insurance scheme. Using a simple model for the determination of the optimal level of insurance coverage, it is shown that the optimal coverage is higher for developing compared to developed countries; a condition that is broadly satisfied by prevailing deposit insurance practices around the world.Deposit insurance;banking, moral hazard, subordinated debt, bank runs, insurance coverage, deposit insurance scheme, bank run, bank failures, insurance system, insurance premium, capital requirements, banking system, risk taking, bank risk, banking crises, deposit guarantee, federal bank capital, capital regulation, insurance limits, deposit insurance coverage, deposit insurance premium, capital requirement, risk aversion, capital adequacy, bank failure, prudential regulation, insurance contributions, bankers, narrow banking, banks ? assets, bank capital regulation, bank risk-taking, bank holding companies, market forces, bank regulators, bank holding, banking sector, banking system stability, bank regulation, banking activities, banking supervisory agency, bank incentive, price risk, bank clients, retail banking, banking supervision, risk profile, economic condition, settlement system, banking regulation, bank rates, insurance systems, bank investment, coinsurance, supplementary capital, banking institutions, bank losses, insurance premiums, bank soundness, bank portfolio, accounting rules, bank creditors, banks with assets, banker, banking panic, bank behavior, bankers association, insured deposit, bank insolvency risk, bank deposit, beneficiaries, capital base, deposit insurance systems, banks ? balance sheets, depositor protection, banks ? balance sheet, risk evaluation, government insurance, credit union, bank assets, bank solvency, present value, bank insolvency, bank loans, bank capital regulations, bank managers, financial systems