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2019
Spring
Vol. 17
RESEARCH REPORT FORUM
Central Bank Reforms
and Institutions
Oana Peia and Davide Romelli
Deposit Insurance
Deniz Anginer, Ata Can Bertay, Stefanie Kleimeier,
Harald Sander, Shusen Qi, João Valle e Azevedo,
REFORM MODEL Diana Bonfim, Esa Jokivuolle, George Pennacchi,
Falko Fecht, Patrick Weber
Who Benefits from
More Transparency in
Parliamentary Voting?
Christine Benesch, Monika Bütler
and Katharina Hofer
DATABASE
Deposit Insurance: System
Design and Implementation
Across Countries
Joop Adema, Christa Hainz
and Carla Rhode
NEWS
New at DICE Database,
Conferences, Booksifo DICE Report ISSN 2511-7815 (print version) ISSN 2511-7823 (electronic version) A quarterly journal for institutional comparisons Publisher and distributor: ifo Institute Poschingerstr. 5, 81679 Munich, Germany Telephone +49 89 9224-0, Telefax +49 89 9224-1462, email ifo@ifo.de Annual subscription rate: €50.00 Editors: Marcus Drometer, Yvonne Giesing, Christa Hainz, Till Nikolka Editor of this issue: Christa Hainz (hainz@ifo.de) Copy editing: Carla Rhode Reproduction permitted only if source is stated and copy is sent to the ifo Institute. DICE Database: www.cesifo-group.org/DICE
VOLUME 17, NUMBER 1, SPRING 2019
FORUM
Deposit Insurance
Deposit Insurance Design and Institutional Environment
Deniz Anginer and Ata Can Bertay 3
Deposit Insurance and Cross-Border Deposits in Times of Banking Crises
Stefanie Kleimeier, Harald Sander, and Shusen Qi 9
Deposit Insurance and Cross-Border Banks
João Valle e Azevedo and Diana Bonfim 14
Designing a Multinational Deposit Insurance System:
Implications for the European Deposit Insurance Scheme
Esa Jokivuolle and George Pennacchi 21
What We Can Learn from the Introduction of Blanket Deposit Guarantees
in Germany 2008 about the Benefits of EDIS
Falko Fecht and Patrick Weber 26
RESEARCH REPORT
Central Bank Reforms and Institutions
Oana Peia and Davide Romelli 30
REFORM MODEL
Who Benefits from More Transparency in Parliamentary Voting?
Christine Benesch, Monika Bütler and Katharina Hofer 36
DATABASE
Deposit Insurance: System Design and Implementation Across Countries
Joop Adema, Christa Hainz and Carla Rhode
42
NEWS
New at DICE Database, Conferences, Books 52FORUM
Deposit Insurance
Deniz Anginer and Ata Can Bertay As with other financial safety net measures, there
is a natural economic trade-off associated with deposit
Deposit Insurance Design and insurance. While it can enhance depositor confidence
Institutional Environment and reduce the likelihood of bank runs during crisis
periods, deposit insurance can also increase moral haz-
ard and make financial systems more vulnerable to cri-
ses during good times. From a public policy perspec-
tive, it is essential to know the factors and design
features that will enhance the stabilization effects of Deniz Anginer
Deposit insurance is a widely used and integral part of deposit insurance while reducing the inevitable adverse The World Bank.
the financial safety net provided by states across the effects. Recent literature suggests that deposit insur-
globe. According to the Bank Regulation and Supervi- ance design and implementation can affect how well
sion Survey (BRSS) conducted by the World Bank, over deposit insurance schemes perform in practice (see
107 countries have some form of explicit deposit insur- Anginer and Demirgüç-Kunt 2018 for a literature
ance scheme in place as of 2016. This number has review). For instance, limiting coverage and scope and
increased substantially from 93 in the year 2013. implementing risk-based pricing can help to alleviate
During and after the global financial crisis (GFC), moral hazard problems and to internalize banks’
some countries introduced new deposit insurance risk-taking.
schemes and others extended the scope and coverage The recent research also emphasizes the role that
of their existing schemes to restore confidence in their the larger institutional environment plays in how effec- Ata Can Bertay
banking systems. For instance, Australia and Singapore tive deposit insurance schemes are in practice as well The World Bank.
introduced explicit deposit insurance to their banking as specific design features that are implemented. In
systems for the first time, whereas Spain and the US particular, the research suggests that it is vital for coun-
increased the limit on the amounts that are covered by tries to cultivate an environment that provides the right
deposit insurance. Other countries increased the scope set of incentives for supervisors and regulators on the
of securities and bank liabilities guaranteed. Most one hand, and private market participants (such as
notably, Ireland extended deposit insurance to most large uninsured depositors, shareholders, and other
bank liabilities, essentially offering a blanket guarantee creditors), on the other, to monitor the banks they
on bonds, subordinated debt, and interbank deposits. invest in. Thus, strong institutions and the rule of law
The significant expansion of explicit deposit insurance can be crucial for effective public and private monitor-
during the crisis rekindled the debate about the effi- ing. In this short article, we discuss how the larger insti-
cacy of deposit insurance schemes and the inevitable tutional environment affects the design, adoption, and
moral hazard problems associated with providing state performance of deposit insurance schemes using the
guarantees. results from the recent Bank Regulation and Supervi-
A vast empirical literature established that deposit sion Survey (BRSS) conducted by the World Bank.
insurance brings economic benefits by ensuring depos- In particular, we categorize economies into two
itor confidence and preventing bank runs. At the same groups using a composite measure of institutional
time, deposit insurance also comes with the unin- quality calculated as the average estimated index of six
tended consequence of encouraging banks to take on indicators drawn from the World Governance Indica-
excessive risk. This standard moral hazard problem tors. These capture various dimensions of institutional
arises because deposit insurance distorts incentives quality such as accountability, political stability, gov-
for bank managers, shareholders, and depositors. Bank ernment effectiveness, regulatory quality, rule of law,
managers and shareholders are incentivized to take on and control of corruption. We compute the average
higher risk, as they privately capture the upside returns institutional quality on a rolling basis for the years
but do not internalize downside losses, which are 2005, 2010, and 2016, thus including both the pre- and
socialized through the deposit insurance fund. By lim- post-GFC periods. Table 1 provides a list of countries
iting downside risk, deposit insurance naturally incen- that are covered in the analyses. We classify countries
tivizes greater risk-taking. Depositors also have less of as having high (above median) institutional quality if
an incentive to be careful in the initial selection of their their composite institutional quality score is above the
bank and monitoring its financial condition, as they are median of all countries in a given year. Likewise, coun-
protected against losses when there is a bank failure. tries are classified as having low (below median) insti-
ifo DICE Report I/ 2019 Volume 17 3FORUM FORUM
Figure 1 and economically developed shows that risk-adjusted pre- Figure 2
countries, Dewenter, Hess, and miums perform better than Use of Risk-Based Premiums
Use of Explicit Deposit Insurance
Brogaard (2018) examine how flat-rate premiums in reducing
Above median institutions
Above median institutions levels of economic freedom, bank risk (Demirgüç-Kunt and
Below median institutions
Below median institutions rule of law, and corruption in Detragiache 2002; Hovakimian, %
% 90
90
82 82
a given bank’s home country Kane, and Laeven 2003).
78 80
80 73 76 affect moral hazard. Even in a Risk-based pricing was ini-
70
70 set of institutionally compara- tially pioneered in the US in the
63
ble countries, the authors find 60
60 early 1990s and quickly spread
that in most cases, better insti- to other countries. In 1997, only 50
50
tutions help mitigate problems four countries (Finland, Peru, 40
40
associated with deposit insur- Sweden, and the US) used risk- 30
30
ance. Focusing on developing based pricing for deposit insur- 20
20
countries, Cull, Senbet, and ance fees (Demirgüç-Kunt and 10
10
Sorge (2004) show that in weak Huizinga, 1999). As of 2016, this 0
0 2005 2010 2016
institutional environments, number has increased to 55.
2005 2010 2016 Note: The figure presents countries, in which deposit insurance fees/premiums charged to banks vary based on some
deposit insurance reduces Figure 2 shows that use of risk- assessment of risk.
Note: The figure presents the percentage of countries with an explicit deposit insurance protection system for banks.
Source: Authors’ calculations from BRSS and WGI (2019). © ifo Institute economic growth and financial based premiums for deposit Source: Authors’ calculations from BRSS and WGI (2019). © ifo Institute
development. insurance in high institutional
More importantly, empiri- quality countries has increased Figure 3
tutional quality if their composite score is below the cal evidence suggests that weak institutional environ- substantially in recent years.
Deposit Insurance Funding
median. Countries highlighted in bold in Table A1 are ments can prevent optimal deposit insurance design. As of 2016, 83 percent of coun-
developing countries, indicating that income groups In particular, the rule of law and other private and pub- tries in this group reported Accumulated funds over total insured deposits (%)
10
(i.e., high-income vs. developing countries) are not fully lic contracting environment features proved important charging premiums based on
9
capturing the institutional quality differences. in deposit insurance adoption and design (Demirgüç- risk. Although there has been
8
Figure 1 shows how the explicit deposit insurance Kunt and Kane 2002; Hovakimian, Kane, and Laeven an increase in the low institu-
7
coverage evolved during the last decade for these two 2003). These, in turn, impact how well deposit insur- tional quality group, it is still 6
sets of countries. Explicit deposit insurance was quite ance schemes function in a given country. Key design well below the high institu- 5
extensive even before the GFC: 78% of countries with features are credible limited coverage, co-insurance, tional quality countries: only 4
high-quality institutions had it in 2005, compared to and risk-based pricing. 38 percent in 2016. 3
63% of countries with low-quality institutions. After the Co-insurance systems, in which deposit insurance Implementing credible 2
GFC, explicit deposit insurance became more common covers less than 100 percent of a depositor’s account limited coverage ex ante is 1
across the world, and the adoption rate in low institu- balance, are one way to incentivize depositors to mon- another crucial design fac- 0
tional quality countries almost caught up with that of itor banks and make more prudent bank choices in tor for deposit insurance to -1,5 -1 -0,5 0 0,5 1 1,5 2
Institutional quality
the high-quality institutions group in 2016. their deposit decision. Over the past decade, co-insur- work effectively. In theoretical
Cross-country analyses of deposit insurance ance systems have been largely removed as it is now models of deposit insurance, Note: The figure presents how the ratio of accumulated funds to total insured deposits is correlated with the
institutional quality index in 2016.
schemes show that in settings with low institutional believed that partial payments in the event of bank fail- bank runs happen as a result Source: Authors’ calculations from BRSS and WGI (2019). © ifo Institute
quality, deposit insurance can be destabilizing and can ures can increase the likelihood of bank runs. Co-insur- of self-fulfilling phenomena
have adverse consequences for market discipline. ance as a design element declined in both the high and (see, for instance, Diamond
Focusing on the rule of law plus the supervision and low institutional quality countries. In particular, the and Dybvig 1983 and extensions). Lack of confidence The recent experiences with deposit insurance in
strength of the legal system, Demirgüç-Kunt and Detra- percentage of countries with high-quality institutions in the banks causes investors to rush to be the first in Cyprus and Iceland illustrate the importance of ade-
giache (2002) examine how various measures of institu- using some form of co-insurance was 38 percent in line to withdraw their funds. If depositors believe that quate funding for deposit insurance for it to be credi-
tional quality affect how well deposit insurance works 2005, and this percentage declined to eight percent by other investors will not run, then only investors with ble. In a sense, all insurance schemes are underfunded,
in different countries. They find that, on average, the 2016. In low institutional quality countries, the per- real liquidity needs withdraw their funds. The bank as it is impossible to have funds in place to fully cover
existence of explicit deposit insurance increases the centage likewise declined from 39 percent in 2005 to six can meet these demands without costly liquidation of all potential losses of depositors. Yet depositors expect
probability that a country will experience a banking cri- percent in 2016. assets. Nevertheless, if everyone believes that a run the government to step in during a crisis and provide a
sis. However, using the institutional quality measures Charging banks risk-adjusted premiums for will occur, then it becomes a self-fulfilling prophecy as full backstop. However, this type of intervention
mentioned above, they find that the probability that deposit insurance coverage is another way to alleviate depositors run to avoid being last in line. The bank is requires the government to have the political will—and
deposit insurance will result in a crisis is significantly moral hazard problems. The premiums charged to then forced to liquidate its long-term assets in a costly more importantly, the economic resources—to do so.
lower in countries with higher levels of institutional banks can either be a flat fee, or they can be based on way. This results in unnecessary economic losses as an In countries where the institutions have deteriorating
quality. the risk a bank poses to the deposit insurance fund. otherwise solvent bank is forced to liquidate. In these and poorly governed finances, intervention is not
Angkinand (2009) and Angkinand and Wihlborg Under such a system, banks with higher asset or loan models, the effectiveness of deposit insurance relies always a viable option, and underfunding can be a real
(2010) analyze the impact of institutional variables such risk (and thus more likely to fail) would be charged heavily on depositors’ confidence that the insurance is possibility. These countries tend to also suffer from
as the rule of law, corruption, and shareholder rights on higher insurance fees. Risk-based pricing can help credible. Even if there is a small chance that the deposit political instability, and it may be challenging to bring
the relationship between deposit insurance and finan- internalize the cost of risk-taking by bank managers insurance scheme will run out of funds, then it is different stakeholders together to agree on providing
cial stability. The authors find that institutional envi- and shareholders, which in turn would curb the exces- rational for depositors to run to the bank and withdraw funds to a dispersed group of depositors.
ronments that incentivize effective public and private sive risk-taking that results from moral hazard. their funds. Thus, deposit insurance schemes must be In theoretical models, the economic cost of
monitoring can alleviate moral hazard effects associ- Although there are issues related to figuring out the credible ex ante in order to stop contagious runs (Bon- deposit insurance is zero, since deposit insurance elim-
ated with deposit insurance. Focusing on financially actuarially fair value of fees, the empirical evidence fim and Santos 2017; Calomiris and Powell 2001). inates an equilibrium in which everyone runs. If deposit
4 ifo DICE Report I/ 2019 Spring Volume 17 ifo DICE Report I/ 2019 Volume 17 5FORUM FORUM
insurance is credible and depositors do not run, then ance funding ratio in the univariate analysis. We also Table 1 harmonized across countries. This approach levels the
taxes do not have to be imposed ex ante to fund the find that deposit insurance coverage indexation (with List of Countries (Median Institutional Quality playing field across different countries and helps to
deposit insurance scheme. However, as credibility can respect to, for example, prices or per capita GDP) is Is between Bulgaria and South Africa) reduce regulatory arbitrage whereby investors move
be an issue in low institutional quality countries, much more common in low institutional quality coun- funds to countries where they expect the local author-
Above median institutions Below median institutions
deposit insurance schemes have to be sufficiently tries. In 2016, 44 percent of the countries in the low ities to increase coverage during times of stress.
funded to assure depositors that there will be resources institutional quality group had some form of indexa- Australia Angola Despite the benefits of limited commitment, dur-
available to cover the losses should their bank fail. tion, up from 11 percent in 2010. The percentage of Austria Argentina ing the GFC, there was a significant expansion of
Accumulating funds to assure this confidence can be countries in the high institutional quality group that Belgium Armenia deposit insurance in both scope and coverage. As of
highly costly, but it is necessary in low institutional had indexation was only 16 percent in 2016, up from ten Bhutan Bahrain 2016, around one-fourth of high institutional quality
quality countries. Consistent with this notion, the percent in 2010. This observation also supports the Botswana Bangladesh countries and one-third of low institutional quality
empirical evidence from the BRSS survey shows that idea that low institutional quality countries are trying Canada Belarus countries reported compensating deposits that were
the size of accumulated funds with respect to total to keep their deposit insurance coverage credible by Cayman Islands Belize not explicitly covered at the time of a bank failure.
insured deposits is negatively related to institutional automatically adjusting the coverage in response to Chile Bosnia and Herzegovina
Moreover, deposit insurance funds have also been used
quality. Figure 3 shows the relationship between the higher inflation or per capita income. for purposes other than covering specific depositor
Costa Rica Brazil
insurance funding ratio (accumulated funds divided by Although adequate funding of insurance schemes losses. Figure 4 shows the percentage of countries in
Croatia Bulgaria
total insured deposits) and institutional quality. We see is important for deposit insurance to be credible, dur- each institutional quality group in which depositor
Cyprus Burundi
that low institutional quality countries tend to accumu- ing the GFC, many countries substantially expanded funds were used for other purposes, such as liquidity
Denmark Colombia
late more funds ex ante, possibly to build credibility. In both the scope and the coverage of deposit insurance support, bank resolution, or recapitalization of weak
Estonia Dominican Republic
particular, a one standard deviation increase in institu- in order to restore stability in their banking sectors. banks. In 2010, 27 percent of countries in the low-qual-
tional quality (0.81 points increase in the index) is Setting clear and limited commitments ex ante is just Finland El Salvador ity institutions group used deposit insurance funds for
related to a 1.3 percent reduction in the deposit insur- as crucial as credibility for deposit insurance to work France Fiji other purposes, compared to just 21 percent of coun-
effectively. Expanding cover- Germany Ghana tries in the high-quality institutions group. However,
Figure 4 age beyond what was prom- Hong Kong SAR, China Greece after the crisis, a higher percentage of countries in the
ised to depositors during the Hungary Guatemala high-quality institutions group used deposit insurance
Use of Deposit Insurance Funds crisis had the effect of reinforc- funds for other purposes—65 percent compared to
Iceland Guyana
2016 2010 ing market expectations that Ireland Honduras
35 percent of countries in the low-quality institutions
the government will step in to group.
Israel India
bail out banks and depositors Most of these changes came during the finan-
65 Italy Indonesia
should the need arise. These cial crisis. Figure 5 shows the percentage of coun-
Above median institutions Jersey Jordan
types of expansions reduce tries in each institutional quality group that have
21 Korea, Rep. Kenya
market discipline and can lead made changes to their deposit insurance schemes in
Latvia Kyrgyz Republic
to greater risk-taking by banks. response to the GFC. Most countries, especially those
Consistent with this notion, a Liechtenstein Lebanon in the high-quality institutions group, significantly
35 number of papers have shown Lithuania Lesotho increased both the limit and the type of accounts cov-
Below median institutions that more generous deposit Luxembourg Malawi ered under deposit insurance. Specifically, 73 percent
27 insurance coverage and scope Macao SAR, China Maldives of the countries in the high-quality institutions group
result in greater moral hazard Malaysia Mexico increased the coverage amount. In the US, for exam-
0 10 20 30 40 50 60 70 % (Honohan and Klingebiel 2000; Malta Moldova ple, the guaranteed limit (per depositor, per bank) was
Note: The figure presents countries, in which the deposit insurance fund is used for purposes other than depositor Demirgüç-Kunt and Detragi- Mauritius Morocco increased from USD 100,000 to USD 250,000 in 2008 to
protection.
ache 2002). Netherlands Mozambique
restore confidence in the banking system at the height
Source: Authors’ calculations from BRSS and WGI (2019). © ifo Institute
Moreover, limited ex ante of the financial crisis. Of the countries in this group, 43
New Zealand Nicaragua
Figure 5 commitment by governments percent also increased the type of liabilities covered
Norway Nigeria
Changes in Deposit Insurance Coverage and Scope
also reduces the costs that by deposit insurance. In Ireland, deposit insurance was
Oman Pakistan
arise from providing insurance expanded to cover all bank liabilities. There was also
Above median institutions Poland Panama
during times of distress. As significant expansion in low institutional quality coun-
Below median institutions bank runs often coincide with Portugal Peru tries: 18 percent expanded the scope, and 55 percent
%
80 73 deteriorating economic condi- Romania Philippines increased the amount covered by deposit insurance.
70 tions and declining asset val- Seychelles Russian Federation Although it is difficult to quantify the long-term effects
60 55 ues, ex post expansion of guar- Slovak Republic Sri Lanka of these expansions, they will nonetheless have an
50 antees can be very costly for Slovenia Suriname adverse impact on market discipline in the future.
43
taxpayers (Allen, Babus, and South Africa Tajikistan In this article, we have shared some empirical
40
Carletti 2009). Since fiscal Spain Tanzania snippets from the latest BRSS survey. Overall, the
30
costs are limited, ex ante com- Thailand
results in the survey reinforce the importance of the
18 Switzerland
20
mitment not to expand insur- larger institutional environment in how well deposit
Taiwan, China Trinidad and Tobago
10 ance can improve the reliabil- insurance schemes are designed and function. It is
United Kingdom Uganda
0 ity and credibility of deposit important to emphasize that poorly designed schemes
Expansion of coverage Increase in amount United States Vanuatu
insurance schemes. Limited in lower-quality institutional environments can
Note: The figure presents countries introducing changes to their deposit protection system as a result of the Uruguay Zimbabwe
2007-2009 global financial crisis.
commitment also ensures that increase the likelihood of a banking crisis. Thus, it is
Source: Authors’ calculations from BRSS and WGI (2019). © ifo Institute deposit insurance schemes are Source: WGI (2019). possible for explicit deposit insurance to do more
6 ifo DICE Report I/ 2019 Spring Volume 17 ifo DICE Report I/ 2019 Volume 17 7FORUM
harm than good for financial stability in countries
with such environments.
REFERENCES
Anginer, D. and A. Demirgüç-Kunt (2018), “Bank runs and moral hazard:
A review of deposit insurance”, The World Bank.
Angkinand, A. P. (2009), “Banking regulation and the output cost of
banking crises”, Journal of International Financial Markets, Institutions
and Money, 19(2), 240–257.
Angkinand, A. and C. Wihlborg (2010), “Deposit insurance coverage,
ownership, and banks’ risk-taking in emerging markets”, Journal of
International Money and Finance, 29(2), 252–274.
Bank Regulation and Supervision Survey (2019). World Bank. https://
www.worldbank.org/en/research/brief/BRSS.
Bonfim, D. and J. A. C. Santos (2017), “The importance of deposit insur-
ance credibility”, mimeo.
Calomiris, C. W. and A. Powell (2001), “Can emerging market bank regu-
lators establish credible discipline? The case of Argentina”, 1992–99.
In Prudential supervision: What works and what doesn’t (147–196). Uni-
versity of Chicago Press.
Cull, R., M. Sorge and L. W. Senbet (2004), “Deposit insurance and bank
intermediation in the long run”, BIS Working Paper No. 156.
Demirgüç-Kunt, A. and E. Detragiache (2002), “Does deposit insurance
increase banking system stability? An empirical investigation”, Journal
of Monetary Economics, 49(7), 1373–1406.
Demirgüç-Kunt, A. and E. J. Kane (2002), “Deposit insurance around the
globe: Where does it work?”, Journal of Economic Perspectives, 16(2),
175–195.
Dewenter, K. L., A. C. Hess and J. Brogaard (2018), “Institutions and
deposit insurance: Empirical evidence”, Journal of Financial Services
Research, 54(3), 269–292.
Diamond, D. W. and P.H. Dybvig (1983), “Bank runs, deposit insurance,
and liquidity”, Journal of Political Economy, 91(3), 401–419.
Honohan, P. and D. Klingebiel (2000), “Controlling the fiscal costs of
banking crises”, World Bank Policy Research Working Paper Series
No. 2441.
Hovakimian, A., E.J. Kane and L. Laeven (2003), “How country and safe-
ty-net characteristics affect bank risk-shifting”, Journal of Financial
Services Research, 23(3), 177–204.
World Governance Indicators (2019), World Bank. http://info.world-
bank.org/governance/wgi/#home.
8 ifo DICE Report I/ 2019 Spring Volume 17FORUM
Stefanie Kleimeier, Harald Sander Responses to weaknesses in deposit protection at
and Shusen Qi home have stabilizing as well as destabilizing effects.
Deposit withdrawals can be stabilizing, as already their
Deposit Insurance and threat can keep banks from engaging in projects that
Cross-Border Deposits in are too risky. But especially during a banking crisis, a
Times of Banking Crises1 flight to safe(r) havens can push the national financial
system into an even deeper crisis. Whether differences
in deposit insurance systems around the globe affect
cross-border deposits in particular during times of cri- Stefanie Kleimeier
sis remains an important, yet under-researched Maastricht University,
University of Stellen-
question. bosch Business School.
Prior to the great financial crisis (GFC) of 2007–08,
INTRODUCTION cross-border deposits increased rapidly in both the
interbank and the retail market. Global deregulation,
Deposit insurance (DI) schemes were first introduced in regional integration initiatives such as the introduction
the 19th century. Some were privately funded, others of the euro, and the elimination of capital controls in
were government sponsored, but ultimately all of these many developing countries enabled banks to expand
early attempts to protect depositors failed. The most cross-border financial services. For customers, foreign
important step toward a central government-spon- deposit markets offer return opportunities and prod-
sored deposit insurance scheme took place in 1933, uct diversity as well as access to safe havens.
with the establishment of the Federal Deposit Insur- Figure 1 depicts the substantial growth of Harald Sander
ance Corporation (FDIC) in the United States.2 Only in cross-border deposits since 1977. By September Technische Hochschule
Köln and Maastricht
the late 20th century did deposit insurance systems 2018, the volume of global cross-border deposits had School of Management.
become a salient feature of regulating the majority of reached USD 26.5 trillion, of which 9 trillion constitute
national banking markets around the world. cross-border deposits from the non-banking sector,
The basic idea of a deposit insurance system is to e.g., households and non-financial companies. The
avoid bank runs by guaranteeing deposits (Diamond GFC is characterized by a sharp retrenchment. On an
and Dybvig 1983). But such a guarantee can stabilize a aggregate level, the cross-border retail market for
banking system only if it is fully credible. Any doubts, deposits is much more resilient in the face of the finan-
especially in times of financial crisis, can cause bank cial crisis than the interbank market. However, as we
customers to attempt to withdraw their deposits. If this argued before, this aggregate resilience can still entail
develops into bank runs, banks will be unable to return substantial reallocations of deposits across countries,
the deposits and the banking system will eventually especially in response to a national banking crisis. Shusen Qi
collapse. Thus, a deeper understanding of the dynamics of cross- Xiamen University.
In the financially more closed economies of the border deposits in response to depositor protection
past, withdrawn deposits could be reinvested in other and banking crises is important for designing deposit
domestic assets, but more often than not were simply insurance systems that stabilize the domestic financial
held in cash. But now under the current conditions system in both tranquil and crisis periods.
of capital account openness and financial globaliza- In this policy note, we summarize our research
tion, depositors have an alternative: by opening bank results on the impact of differences in deposit insur-
accounts abroad, they can
transfer their savings to coun- Figure 1
tries that offer better and more The Growth of Cross-Border Deposits
credible protection for their
Total deposits
deposits. Consequently, differ- Interbank deposits
ences in depositor protection Deposits from non-banks
Trillion US dollar
among countries can induce 35
cross-border deposit flows. 30
Such flows may become sub-
stantial when depositors are 25
experiencing a banking crisis in 20
their home country.
15
1
This article is based on Qi, S., S. Kleimeier
and H. Sander (2019), “The travels of a bank 10
deposit in turbulent times: The importance
of deposit insurance design for cross-border 5
deposits” Working Paper available at SSRN:
http://dx.doi.org/10.2139/ssrn.2668495.
2 0
The first central government-sponsored
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
deposit insurance system was introduced in
Czechoslovakia in 1924. See Eisenbeis and
Kaufman (2015) for more historical details. Source: BIS, Locational Banking Statistics, Table A3. Illustration based on Qi, Sander, Kleimeier (2019). © ifo Institute
ifo DICE Report I/ 2019 Volume 17 9FORUM FORUM
ance systems around the globe on cross-border depos- deposit insurance scheme is important. Limited or Figure 2
its, with a special focus on potential changes in depos- restricted coverage reduces moral hazard as large, Deposit Insurance Schemes around the World
iting behavior when countries are going through a sophisticated depositors remain uninsured and thus
banking crisis. Our research utilizes locational banking have an incentive to monitor and discipline banks by Explicit DI
Power
statistics from the Bank of International Settlements demanding higher deposit rates or refusing to deposit
(BIS). These statistics come with the caveat that only funds altogether (Garcia 1999). In contrast, depositors
half of the 47 BIS “bank countries” report in detail about might be more attracted to a banking market where
which other countries they receive deposits from, with deposit insurance coverage is more extensive, as the
coverage typically starting in the mid-1990s. Until 2007, responsibility for monitoring and disciplining shifts to
none of these bank countries had experienced a bank- the deposit insurance agency. Thus, both a deposit
ing crisis. Hence, we first investigate the impact of the insurance scheme’s coverage level and intensity (which
64 banking crisis years in the depositors’ home coun- includes a coverage limit and a formal coinsurance
tries, which are included in our sample. The GFC trig- scheme) matter. Besides these de jure coverage char-
gered banking crises in the BIS bank countries, too. As acteristics, the deposit insurance scheme’s repayment
a reaction to this global and systemic crisis, many of history is a de facto feature that might influence depos- Moral hazard mitigation Coverage intensity
these countries announced emergency actions in form itor and bank behavior.
of ad hoc government guarantees. Most prominently, Furthermore, a deposit insurance scheme must be
the German government’s announcement that “savers’ credible, i.e., the depositor must believe that it is capa-
deposits are safe” was a credible action that German ble of covering all insured potential losses. Therefore,
savers believed and that thus kept German savings in the power of the deposit insurance agency is of utmost
German banks. But what did this statement do to bank importance. It derives this power from the ability to
deposits in other countries? intervene in a bank, to cancel or revoke insurance for
any participating bank, and to take legal action against
DEPOSIT INSURANCE SCHEMES AROUND THE bank directors or officials. Regarding the latter, it also
WORLD BEFORE THE GLOBAL FINANCIAL CRISIS matters whether the deposit insurance agency has ever
actually taken any such legal action. A deposit insur-
By 2006, most advanced economies had some kind of ance agency without this power might well prove inef- Coverage limit Repayment history
explicit deposit insurance system in place. Among our fective. For example, Garcia (1999) argues that a weak
bank countries, only Australia had none, but intro- relationship between the deposit insurance agency
duced one on October 12, 2008, shortly after the Leh- and the bank supervisors, who instead of the deposit
man bankruptcy. As we pointed out before, the exist- insurance agency have the authority to resolve bank
ence of a deposit insurance scheme can not only failures, can reduce the agency’s power.
prevent bank runs but also make a banking market In sum, effective protection of depositors depends
attractive. In 2006, 79 of the countries surveyed by the crucially on the overall design and implementation of
World Bank had an explicit scheme, compared to only the deposit insurance scheme (Eisenbeis and Kaufman
62 in 1998. During this period, no country removed its 2015). Based on data obtained from the World Bank’s
explicit deposit insurance scheme.3 Bank Regulation and Supervision Surveys, we have cre- Note: Darker colors indicate a stronger deposit insurance scheme.
While protecting savers, deposit insurance—like ated proxies for five major deposit insurance features Source: World Bank (2007) Bank Regulation and Supervision Survey, authors' calculations. Illustration based on Qi, Sander, Kleimeier (2019). © ifo Institute
every insurance scheme—can
create moral hazard by incen- Table 1
tivizing higher risk-taking by Deposit Insurance Characteristics (Table 1). Figure 2 depicts the state of global deposit depositors do not merely assess a foreign banking mar-
banks (Barth, Caprio and Levine Characteristic Survey questions insurance in 2006 just before the onset of the GFC. It ket on its own terms; they also compare its conditions
2004; Demirgüç-Kunt and illustrates how, despite deposit market internationali- with those at home. If, for example, the difference
Explicit DI (1) Is there an explicit deposit insurance protection system?
Detragiache 1997, 2002; Rossi zation, there are significant differences among coun- between the best deposit insurance abroad and the
Power (1) Does the deposit insurance authority make the
1999). Regulators can mitigate decision to intervene in a bank? tries’ deposit insurance schemes, which may increase protection at home is small, it does not make much
this by requiring bank rather (2) Does the deposit insurance authority have the legal power to cancel or the attractiveness of a deposit market for foreign sense to move deposits abroad given the transaction
revoke deposit insurance for any participating bank?
than government funding, or by (3) Can the deposit insurance authority take legal action for violations depositors. costs. But as long as deposit insurance schemes differ
against laws, regulations,and bylaws against bank officials?
setting risk-based insurance from country to country, depositors have the opportu-
(4) Has the deposit insurance authority ever taken legal action for violations
fees as part of the deposit insur- against laws, regulations, and bylaws against bank officials? CROSS-BORDER DEPOSITING: SEARCHING FOR A nity to engage in regulatory arbitrage, i.e., to take
ance scheme (Demirgüç-Kunt Moral hazard mitigation (1) Is the deposit insurance funded by banks? SAFE HAVEN OR REGULATORY ARBITRAGE? advantage of differences in regulation by transferring
and Detragiache 2002). (2) Do deposit insurance fees charged to banks vary based on some assess- their savings to a country with a better deposit insur-
ment of risk?
For both banks and depos- Coverage limit What is the deposit insurance limit per account in US$?
Cross-border depositing allows depositors to transfer ance scheme than the one in their home country.
itors, the extent to which their savings to countries with deposit insurance schemes In Qi, Kleimeier and Sander (2019), we extend the
Coverage intensity (1) Is there a no limit per person?
deposits are covered by the (2) Is there no formal coinsurance? that offer extensive and credible protection. The existing literature by exploring not only the impact of the exist-
3
The World Bank regularly assesses the Repayment history (1) Were insured depositors wholly compensated (to the extent of legal
literature largely looks at this safe haven effect4: the bet- ence of a deposit insurance scheme, but also the effect
state and design of deposit insurance sche- protection) the last time a bank failed? ter the protection offered by a country’s banks, the various features of such a scheme have on depositors’
mes through its Bank Regulation and Super- (2) Were any deposits not explicitly covered by deposit insurance at the time
vision Surveys, available at https://www. of the failure compensated when the bank failed? more foreign deposits they can attract. However, safe haven and regulatory arbitrage behavior. Our
worldbank.org/en/research/brief/BRSS. We
4
For early contributions, see Lane and Sarisoy (2000) and Huizinga and
results indicate that depositors take a broad and
rely on these surveys to measure specific Source: Own definition of DI feature categories based on the survey questions in the 'Depositor (Sa-
deposit insurance characteristics.
vings) Protection Schemes’ section of the World Bank's Bank Regulation and Supervision Surveys. Nicodème (2006). encompassing view of foreign deposit insurance sys-
10 ifo DICE Report I/ 2019 Spring Volume 17 ifo DICE Report I/ 2019 Volume 17 11FORUM FORUM
tem when searching for a safe Figure 3 continent. Prior to the GFC, the main goal of deposit high on the regulators’ priority list (ECB 2016). A
haven. They consider all char- Cross-Border Deposits and Emergency Actions
insurance agencies was protecting small depositors, as well-designed European deposit insurance scheme is
acteristics of a deposit insur- they did not have the ability to understand and monitor crucial in this context.5 Our results show that it is not
No government guarantee
ance scheme, including its the risks taken by financial institutions. However, after only the existence of such a scheme that is important,
Government guarantee
power, coverage intensity, and Million US dollar the GFC, maintaining and strengthening the stability of but all its features as well—not least the power that will
80
coverage limit—but not its the financial system has been set as the primary goal, be accorded the deposit insurance agency.
repayment history. This omis- 70 dropping the protection of small depositors down to
sion suggests that cross-bor- 60 secondary importance (Bernet and Walter 2009). REFERENCES
der depositors interpret a 50
Figure 3 provides a vivid illustration of the impact
Barth, J. R., G. Caprio and R. Levine (2004), “Bank regulation and super-
strong repayment history of government emergency actions on cross-border vision: What works best?”, Journal of Financial Intermediation, 13(2),
40
simultaneously as a negative deposits. It compares average bilateral cross-border 205–248.
signal—indicating past bank 30 deposit volumes of countries that introduce govern- Bernet, B. and S. Walter (2009), “Design, structure and implementation
of a modern deposit insurance scheme”, SUERF Studies No. 2009/5.
failures—and a positive sig- 20 ment guarantees to those that do not. Before 2008,
Demirgüç-Kunt, A. and E. Detragiache (1997), “The determinants of
nal—indicating that depositors both groups of countries show a similar development of banking crises: Evidence from developing and developed countries”,
10
were covered. Regulatory arbi- cross-border deposits. Since 2008, however, the exten- World Bank Policy Research Working Paper no. 1828.
0
trage behavior, in contrast, is sion of government guarantees has resulted in a sub- Demirgüç-Kunt, A. and E. Detragiache (2002), “Does deposit insurance
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 increase banking system stability? An empirical investigation”, Journal
motivated by a much narrower stantial increase in cross-border deposits for countries of Monetary Economics, 49(7), 1373–1406.
Note: Bank countries are categorised into those that provide a government guarantee and those that do not.
set of deposit insurance For each group, the average volume of received, bilateral cross-border deposits is shown.
that took such action. In Qi, Sander and Kleimeier Diamond, D. W. and P.H. Dybvig (1986), “Banking theory, deposit insur-
scheme features. Here deposi- Source: Qi, Kleimeier and Sander (2019). © ifo Institute (2019), we conduct difference-in-difference analyses ance, and bank regulation”, Journal of Business, 59(1), 55–68.
tors seem to ask only two ques- that substantiate this visual impression. Bilateral ECB (2016), “Financial Integration in Europe 2016, Special Feature A:
Financial Integration and Risk sharing in a Monetary Union”, Frankfurt:
tions: Does the foreign country cross-border deposits increase when the government European Central Bank.
deliver the explicit deposit insurance protection that that depositors completely lose faith in all banking issues guarantees, whether limited or unlimited. Even Eisenbeis, R. A. and G. G. Kaufman (2015), “Deposit insurance issues in
my home country fails to provide? Is the foreign deposit markets and deposit insurance systems, and no longer when hit by a crisis, foreign banking markets can the post-2008 crisis world”, in A.N. Berger, P. Molyneux and J.O.S. Wilson,
eds., The Oxford Handbook of Banking, Oxford University Press, Oxford,
insurance agency more powerful than mine at home? engage in safe haven or regulatory arbitrage behavior remain attractive safe havens for cross-border deposi- 527–49.
Smaller differences between the other features may at all. Kleimeier, Sander and Heuchemer (2013) sug- tors by making credible commitments to depositor pro-
Garcia, G. G. H. (1999), ”Deposit insurance: A survey of actual and best
not provide sufficient benefits to compensate for trans- gest that depositors do indeed discipline the domestic tection. For cross-border flows, this implies that depos- practices”, International Monetary Fund Working Paper no. WP/99/54.
action costs. banking market during a systemic banking crisis, but its can be relocated to safe havens on a large scale. As Huizinga, H. and G. Nicodème (2006), “Deposit insurance and interna-
But does this safe haven and regulatory arbitrage move deposits abroad only once a banking crisis is a result, countries with weaker deposit insurance pro- tional bank liabilities”, Journal of Banking andFinance, 30(3), 965–87.
behavior persist when depositors experience a banking clearly systemic. Thus, during the early phases of the tection and less credibility will be confronted with Kleimeier, S., H. Sander and S. Heuchemer (2013), “Financial crises and
cross-border banking: New evidence”, Journal of International Money
crisis at home? This is a salient question, as even before crisis, depositors still trust their home country’s deposit increased—and potentially destabilizing—capital and Finance, 32, 884–915.
the GFC, systemic banking crises frequently disrupted insurance. However, such depositor discipline is short- outflows. Lane, P. R. and S. Sarisoy (2000), “Does deposit insurance stimulate
markets. In our data set of 131 countries, we observed lived, as trust is typically restored within two years after capital inflows?” Economics Letters, 69(2), 193–200.
165 crisis episodes between 1998 and 2011, of which the start of a crisis. CONCLUSION Martinez P.M.S. and S.L. Schmukler (2001), “Do depositors punish banks
for bad behavior? Market discipline, deposit insurance, and banking
64 took place before the GFC (see Table 2). During such In Qi, Kleimeier and Sander (2019), we find that crises”, Journal of Finance, 56 (3), 1029–51.
episodes, depositors are likely to increase market dis- when going through a banking crisis at home, depos- Well-designed deposit insurance systems do not simply Qi, S., S. Kleimeier and H. Sander (2019), “The travels of a bank deposit
cipline as “traumatic episodes may act as wake-up itors move funds abroad, predominantly in search of protect a country’s domestic banking market from in turbulent times: The importance of deposit insurance design for
cross-border deposits” Working Paper available at SSRN: http://dx.doi.
calls for depositors” (Martinez Peria and Schmukler a safe haven. Regulatory arbitrage considerations bank runs and moral hazard, but can also induce org/10.2139/ssrn.2668495.
2001). In consequence, safe haven and regulatory arbi- no longer matter, except when depositors are not cross-border deposit flows that enhance the home Rossi, M. (1999), “Financial fragility and economic performance in
trage might thus become even stronger motivators for protected by an explicit deposit insurance scheme country’s financial stability. Regulators therefore need developing economies: Do capital controls, prudential regulation and
supervision matter?”, International Monetary Fund Working Paper no.
cross-border depositing. However, it may also happen at home. In other words, in times of crisis, the best to assess their regulation vis-à-vis that of other coun- 99/66.
becomes the enemy of the good: being somewhat bet- tries. This is true in tranquil times, but becomes even Schoenmaker, D. (2018), “Building a stable European deposit insurance
Table 2 ter than the depositor’s deposit insurance at home is more important in times of crisis when customers “go scheme”, Journal of Financial Regulation, 4(2), 314–20.
Systemic Banking Crises not sufficient to attract savings from crisis countries for the best,” i.e., shift their savings to the safe havens
Year Number of countries that experience
a systemic banking crisis
that have received their wake-up call. of the world. This way, depositors can trigger a regula- 5
For a recent contribution see Schoenmaker (2018).
1998 24
tory race to the top.
1999 14 THE EFFECT OF EMERGENCY ACTIONS DURING Our results show that especially during crises,
2000 9 THE GLOBAL FINANCIAL CRISIS credibility is crucial. A credible deposit insurance
2001 7 scheme prevents additional financial stress via capital
2002 4 The GFC sounded a wake-up call for the global econ- flight. Our findings provide new evidence by identifying
2003 3 omy, and the systemic banking crisis threatened the those deposit insurance features that are particularly
2004 2 credibility of deposit insurance schemes of former safe important in inducing cross-border deposit flows, and
2005 1 havens. As a consequence, many countries revised can thus be instrumental for designing deposit insur-
2006 0 their deposit insurance schemes between September ance schemes for financially open economies.
2007 2 2008 and March 2019. According to the International Finally, our results may also inform the ongoing
2008 24 Association of Deposit Insurers, at least 49 countries debate on making the European Monetary Union (EMU)
2009 25 enhanced depositor protection, ranging from full gov- more crisis-resilient. Given the importance of joint
2010 25 ernment guarantees to temporary increases in govern- risk-sharing in a monetary union and the limited sup-
2011 25 ment-sponsored coverage. These actions were initi- port for fiscal risk-sharing within the EMU, private
Source: Laeven andValencia (2012). We include borderline systemic banking crises. ated in Europe but quickly spread to nearly every risk-sharing via retail banking market integration ranks
12 ifo DICE Report I/ 2019 Spring Volume 17 ifo DICE Report I/ 2019 Volume 17 13FORUM FORUM
João Valle e Azevedo and Diana Bonfim reconcile these opposing perspectives, finding that credibility of the deposit insurance fund backing the One recent example of how the conflicts between
before the global financial crisis, ample safety nets claims. 3 home and host authorities can shape the outcome of a
Deposit Insurance and coming from deposit insurance induced excessive In some cases, host countries of foreign branches financial crisis comes from Iceland (Allen et al. 2011).
Cross-Border Banks1 risk-taking, while during the crisis these schemes were might prefer home country regulation and supervision Immediately after Lehman Brothers collapsed, three
a pillar in safeguarding financial stability. if the home country’s deposit insurance scheme is large internationally active Icelandic banks failed.
Despite the prevalence of deposit insurance as strong and if the branch is large relative to its banking These banks had adopted aggressive growth strategies
an institutional pillar, there is substantial heteroge- group. In this case, the home authorities might be more in the preceding years, relying on the collection of inter-
neity in its design (Demirgüç-Kunt and Kane 2001; worried about potential spillovers from the branch into net deposits through foreign branches and subsidiaries
Demirgüç-Kunt and Huizinga 2004; Beck and Laeven the banking group that they would be responsible for. (IADI 2011). Depositors in these banks were thus subject
Deposit insurance is one of the pillars of trust in the 2006; Demirgüç-Kunt et al. 2015). This has important Still, a banking system where large foreign branches to a wide array of home and host oversight and deposit
banking system. This trust is deeply anchored in the implications. For instance, Huizinga and Nicodeme are important might be more exposed to fluctuations in insurance arrangements, which were not easily grasped
belief that the sovereign stands ready to reimburse (2002) show that international depositors are sensitive financial intermediation that are not easily dealt with by depositors. The Icelandic insurance fund was not
depositors in case of a bank failure. What does this to differences in national deposit insurance policies. by host policymakers. If the home country’s deposit able to immediately reimburse depositors of the failing
mean for banks operating across different coun- Eisenbeis and Kaufman (2008) discuss the flaws in insurance scheme is weak, then exposure to large for- banks, requiring the adoption of emergency funding
tries? Are differences in the design and protection of decentralized deposit insurance schemes in the US and eign branches is clearly a material risk for the host agreements with institutions from other countries. This
deposit insurance behind some banks’ reluctance how these offer important lessons for European poli- authorities. To avoid such risks, supervisors often favor episode made clear the importance of close integration
to expand across borders? Can these differences be cymakers. Hardy and Nieto (2008) show that uncoordi- the legal form of a subsidiary. For instance, New Zea- between deposit insurance and resolution authorities,
João Valle e Azevedo explored to attract depositors with heterogeneous risk nated deposit insurance policies around the world can land requires foreign banks to be incorporated as sub- most notably when dealing with large internationally
Banco de Portugal preferences? lead to insufficient supervision and excessive deposit sidiaries (IADI 2011). active banking groups (IADI 2011). It also showed that
and Nova SBE.
In this article we discuss these issues, focusing insurance. When financial stability is threatened, the inter- depositors in foreign branches may be unprotected if
especially on the current situation in the European ests of stakeholders from the home and host countries the parent bank is unable to protect the branch opera-
Union. The euro area sovereign debt crisis, with its BRANCHES VERSUS SUBSIDIARIES: WHAT DOES IT of cross-border banks often come into conflict. The tion (and if the home country deposit insurance scheme
onset in the early 2010s, paved the way for a strong MEAN FOR DEPOSIT INSURANCE? agency problems that arise from competition among or, ultimately, the sovereign backing it up, is not strong
political consensus on strengthening the financial inte- regulators can have crucial implications for the resolu- or credible enough).
gration dimension of the European project. Today there Given the heterogeneity in the design of deposit tion of distressed institutions, the magnitude and dis-
is a single banking supervisor and a single resolution insurance around the world, there are key implica- tribution of costs coming from potential failures, and THE CREDIBILITY OF DEPOSIT INSURANCE
mechanism. But the banking union will remain incom- tions for cross-border banks. When a bank expands the externalities created (Eisenbeis and Kaufman 2008;
plete until an agreement is reached on a common across borders, a crucial decision needs to be made: Dell’Ariccia and Marquez 2006). Schüler (2003) argues While depositors are more likely to react to differences
Diana Bonfim deposit insurance scheme. Looking into the current sit- will the bank operate as a branch or as subsidiary? that the conflicts typically arise in two dimensions: a in deposit insurance during a crisis (Bonfim and Santos
Banco de Portugal and uation in Europe can thus be an important exercise in For the bank’s day-to-day operations, that decision home country dimension and an international dimen- 2019), these differences may be relevant even in normal
Católica Lisbon SBE.
better understanding what is special about deposit does not entail major consequences. The customers sion. The home country dimension is related to princi- times, especially for larger depositors with cross-bor-
insurance for cross-border banks. of a foreign bank will most likely be unaware of the pal/agent problems between bank supervisors and der operations. Huizinga and Nicodeme (2002) show
Of course, the implications of this discussion go legal status of their bank—unless something goes taxpayers. These may be reflected in insufficient capi- that international depositors react to differences in
beyond the European debate. That said, heterogene- wrong. In a recent paper, Bonfim and Santos (2019) tal requirements or regulatory forbearance, most nota- national deposit insurance policies. International
ous deposit insurance guarantees are possibly even show that during a crisis, bank depositors seem to be bly when financial institutions become distressed. depositors (e.g., large firms) prefer to place their funds
more challenging for banks that operate across other well aware of the differences between a branch and a More importantly for the issues we are discussing, in in countries with explicit deposit insurance, most nota-
jurisdictions where further legal and financial differ- subsidiary. Indeed, in financial distress, the distinc- the international dimension, Schüler (2003) argues that bly if the deposit insurance schemes have co-insur-
ences coexist. tion is not trivial. While a subsidiary is a fully-fledged when foreign banks increase their market share ance, private administration, and a low deposit insur-
legal entity in the country where it operates (the host through branches (rather than through subsidiaries), ance premium. These results suggest that countries
DEPOSIT INSURANCE AROUND THE WORLD country), a branch does not have legal autonomy from host country regulators are faced with a loss of super- can alter the design of their deposit insurance protec-
the parent bank. If a subsidiary fails, the host author- visory and regulatory power over the risks their country tion to capture a larger share of the market for interna-
For many decades, deposit insurance was seen as an ities are responsible for dealing with the process. The truly faces. This makes regulation, supervision, and tional deposits, thus leading to international competi-
undebatable institution in advanced economies and as supervision of a subsidiary is typically the responsibil- resolution more challenging in countries with a sub- tion in deposit insurance.
a synonym of progress and financial development in ity of the host, even though the home authorities are stantial foreign bank presence, especially if branches As we will discuss later, the current state of the
emerging markets. Since Diamond and Dybvig (1986) responsible for supervising the consolidated banking are the main legal form. Host authorities are tempted banking union in Europe ensures that rules and regula-
showed how deposit insurance was crucial to prevent groups. The same is usually true for resolution pow- to protect their own citizens, even at the expense of cit- tions on deposit insurance are, albeit with some poten-
bank runs, no one questioned the need to offer this pro- ers and for deposit insurance. In the European Union, izens from the home country or from other host coun- tial heterogeneity, common across the entire European
tection to depositors. The only open debate on this if a subsidiary fails, the host deposit insurance fund tries, given that they are typically also responsible for Union, thus eliminating the scope for competition
topic was about whether the existence of deposit insur- is responsible for reimbursing insured depositors. financial stability (Eisenbeis and Kaufman 2008). At the across jurisdictions based on depositor protection.
ance made banks riskier, as depositors had fewer This situation is quite different from branches: host same time, the home country regulators and supervi- However, even though the rules apply across the EU,
incentives to actively monitor banks. Most of the exist- country supervisors have some power when dealing sors might have difficulties in identifying (and acting fiscal responsibility is still national. That means that in
ing literature supports this view (Demirgüç-Kunt and with branches, but these are quite limited. Most of the upon) the externalities that a failure may create in the the event of a bank failure, depositors in a given coun-
Detagriache 2002; Demirgüç-Kunt and Huizinga 2004; responsibility falls to the home authorities, including host countries. All these tensions are not easy to resolve try will be reimbursed by the domestic authority, unless
Ioannidou and Penas 2010; Karas et al. 2013), though in matters of deposit insurance. 2 Against this back- and present challenges to cross-border integration. their deposits are held in a foreign branch, in which
there is also evidence to the contrary (Martinez Peria drop, depositors in a given country may face differ- case depositors are insured in the home country of the
3
Eisenbeis and Kaufman (2008) note that “When a large number of foreign
and Schmukler 2001; Lamer 2015). Anginer et al. (2014) ent levels of protection, depending on the design and branches from different home countries coexist in a host country, bank cus-
branch’s parent bank. This has certain implications:
tomers in that country may encounter a wide variety of different insurance Bonfim and Santos (2019) show that during the euro
1
The opinions expressed in the article are those of the authors and do not plans. These plans are likely to differ, at times significantly, in terms of ac-
necessarily reflect those of Banco de Portugal or the Eurosystem. Any errors 2
Even though the host authorities might also choose to offer additional count coverage, premiums, insurance agency ownership (private vs. govern-
area sovereign debt crisis, Portuguese depositors took
or omissions are the sole responsibility of the authors. deposit insurance to depositors in branches of foreign institutions. ment) and operation, ex ante funding and credibility.” action in response to the perceived credibility of the
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