Market Discipline and Financial Safety Net Design

Asli Demirguc-Kunt and Harry Huizinga

No 2311, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: An important question is whether the financial safety net reduces market discipline on bank risk taking. For countries with varying deposit insurance schemes, we find that deposit rates continue to reflect bank riskiness. Cross-country evidence suggests that explicit deposit insurance reduces required deposit interest rates at a cost of reduced market discipline. Internationally, deposit insurance schemes vary widely in their coverage, funding, and management. Hence, there are widely differing views on how deposit insurance should optimally be structured. To inform this debate, we use a newly constructed data set of deposit insurance design features to examine how different design features affect deposit interest rates and market discipline.

Keywords: Deposit Insurance; Market Discipline (search for similar items in EconPapers)
JEL-codes: E43 G28 (search for similar items in EconPapers)
Date: 1999-12
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Citations: View citations in EconPapers (62)

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Working Paper: Market discipline and financial safety net design (1999)
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