Safety Net Design and Systemic Risk: New Empirical Evidence

Klüh, Ulrich (June 2005): Safety Net Design and Systemic Risk: New Empirical Evidence. Discussion Papers in Economics 2005-12

Abstract

Recent econometric evidence has noticeably changed views on the desirability and the appropriate design of explicit Deposit Insurance Schemes (DIS). The purpose of this paper is to take a second look at the data. After surveying recent empirical work and providing a theoretical framework, we argue that existing studies may suffer from a selection bias. Building on a new database on explicit deposit insurance compiled by the author, we perform a variety of semi-parametric and parametric tests to see whether and how explicit deposit insurance (de)stabilizes banking systems. We find that the evidence indeed suggests that a selection bias is present. Controlling for this bias leads to a reassessment of recent studies. In particular, making deposit insurance explicit has a rather moderate and, if any, stabilizing effect on the probability of experiencing a systemic crisis.

• Item Type: Paper (Discussion Paper)
• Keywords: Deposit Insurance ; Banking Fragility ; Systemic Risk
• Subjects: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Financial Markets
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Economics
• Journal of Economic Literature classification: C14, G21, G28
• Language: English