Designing an Efficient and Incentive Compatible Government-Provided Deposit Insurance Program for Developing and Transitional Economies

REVIEW OF PACIFIC BASIN FINANCIAL MARKETS AND POLICIES, Vol. 1 No. 1, March 1998

Posted: 16 May 1998

Abstract

This paper reviews the causes of recent banking crises, particularly in the United States. The paper argues that to the extent banks are perceived to be "special," it is primarily because of poorly designed special public policies, particularly safety nets, rather than their inherent characteristics. These flaws have contributed to the costly recent banking crises in most countries of the world. As a result, preventing future crises centers on correcting the flaws in these policies. The U.S. reformed its government-provided deposit insurance structure in the Federal Deposit Insurance and Corporation Improvement Act (FDICIA) of 1991 to reduce the moral hazard problem of banks and the agency problem of regulators. The reform focuses on imposing regulatory discipline that mimics the discipline the market imposes on firms not subject to a safety net and on resolving a troubled bank before its economic capital is negative. If successful, this would impose losses only on shareholders and make deposit insurance effectively redundant. Aspects of this new structure appear to be appropriate for other countries.

JEL Classification: G2

Suggested Citation

Kaufman, George G., Designing an Efficient and Incentive Compatible Government-Provided Deposit Insurance Program for Developing and Transitional Economies. REVIEW OF PACIFIC BASIN FINANCIAL MARKETS AND POLICIES, Vol. 1 No. 1, March 1998, Available at SSRN: https://ssrn.com/abstract=88488

George G. Kaufman (Contact Author)

Loyola University Chicago ( email )

820 North Michigan Avenue
School of Business
Chicago, IL 60611
United States
312-915-7075 (Phone)
312-915-8508 (Fax)

HOME PAGE: http://www.luc.edu/faculty/gkaufma/

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