Deposit insurance systems (DIS) play a key role in building confidence among depositors and helping keep their money safe. However, deposit insurance should never be considered a "magic bullet," a "quick fix" or a stand-alone solution to maintain financial stability.
The 2008 global financial crisis created a crisis of confidence in banking systems around the world. As a response, the number of countries with deposit insurance systems quickly shot up from 84 (in 2003) to 125 (in 2016). For the existing DIS, this period tested their design and effectiveness.
Over the past decade, the FIRST Initiative has funded 16 projects across the globe to assist in strengthening existing deposit insurance systems or establishing new ones. Drawing from these experiences, we recently published a Lessons Learned Note on the Challenges in Building Effective Deposit Insurance Systems in Developing Countries. The note provides seven lessons learned from our work across the six World Bank regions and provides a number of specific country examples.
The note provides insights to better understand: (1) the role of a DIS, (2) how to design an appropriate framework and (3) keys to effective implementation and operations.
I don’t think so. You may think this is an odd statement since nearly every country around the world has been busy either introducing or at least expanding its insurance coverage since the 2008 financial crisis. This is not surprising, considering that the U.S. was also in the midst of a banking crisis in 1933 when it first introduced deposit insurance.
But think of it this way. Deposit insurance is not meant to stop systemic crises; as we all know by now, governments do that. The purpose of deposit insurance is to protect individual banks from bank runs, mostly during normal times. Since large banks already have implicit protection because they are perceived to be “too-big-to-fail,” deposit insurance is really there to keep small banks in business. To the extent we believe small banks have an important role to play in supporting small, local businesses, this may be a worthy goal. But why do we still have deposit insurance for large banks?