Market discipline and financial safety net design

Asli Demirguc-Kunt and Harry Huizinga

No 2183, Policy Research Working Paper Series from The World Bank

Abstract: There has been little empirical work on the effectiveness of safety nets designed for banks, for lack of data on safety net design across countries. The authors examine cross-country data on bank-level interest expense and deposit growth for evidence of market discipline in individual countries. In addition, using cross-country information on deposit insurance systems, they investigate the impact of explicit deposit insurance (and its key features) on bank interest rates and market discipline. They find that: 1) Many countries retain some degree of market discipline, regardless of the type of safety net. 2) The existence of explicit deposit insurance lowers banks'interest expenses and makes interest payments less sensitive to bank risk factors, especially bank liquidity. 3) Higher explicit coverage, broader coverage, and the existence of an earmarked insurance fund increase required-deposit rates and reduce market discipline. 4) Private (especially joint) management of insurance schemes lowers deposit rates and improves market discipline.

Keywords: Financial Intermediation; Banks&Banking Reform; Insurance&Risk Mitigation; Payment Systems&Infrastructure; Insurance Law; Banks&Banking Reform; Financial Intermediation; Insurance&Risk Mitigation; Insurance Law; Financial Crisis Management&Restructuring (search for similar items in EconPapers)
Date: 1999-09-30
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Citations: View citations in EconPapers (41)

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Working Paper: Market Discipline and Financial Safety Net Design (1999)
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