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Market discipline and financial safety net design

Author

Listed:
  • Demirguc-Kunt, Asl1
  • Huizinga, Harry
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.

Suggested Citation

  • Demirguc-Kunt, Asl1 & Huizinga, Harry, 1999. "Market discipline and financial safety net design," Policy Research Working Paper Series 2183, The World Bank.
    • Handle: RePEc:wbk:wbrwps:2183
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    References listed on IDEAS

    as
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    More about this item

    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;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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