Determinants of deposit-insurance adoption and design

Causes of poor design of national financial safety nets

This report seeks to identify factors that influence decisions about a country's financial safety net using a new dataset on 170 countries covering the 1960-2003 period.

The analysis finds that pressure to emulate developed-country regulatory frameworks and power-sharing political institutions dispose a country toward adopting design features that inadequately control risk-shifting.

Overall, the policy lesson is not that deposit insurance is to be avoided but that:

democratic systems, which allow sectoral interests to negotiate more openly with one another, prove more likely to adopt deposit insurance and (at least initially) to design it poorly
systems installed in crisis circumstances and in response to external pressures to emulate other countries are especially apt to be poorly designed

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Determinants of deposit-insurance adoption and design