Deposit Insurance as Private Club : Is Germany a Model?
The author describes, and evaluates the deposit insurance scheme set-up by private commercial banks in Germany in 1975. The scheme's funding, and management are completely private, with no pubic supervision. Where other schemes rely on monitor...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/02/1047384/deposit-insurance-private-club-germany-model http://hdl.handle.net/10986/19705 |
| Summary: | The author describes, and evaluates the
deposit insurance scheme set-up by private commercial banks
in Germany in 1975. The scheme's funding, and
management are completely private, with no pubic
supervision. Where other schemes rely on monitoring by
depositors to decrease moral hazard problems, the German
scheme relies on peer monitoring by its member banks. The
system has weathered several small bank crises, but has not
yet been exposed to a major bank failure, or a systemic
crisis. To what extent can it serve as a model for other
countries? The success of the German scheme has to be judged
against an institutional environment that fosters contract
enforcement, and the rule of law, and discourages
corruption. In a country with weaker institutions, the
voluntary membership might quickly lead to adverse
selection, with strong banks leaving the scheme. The high
coverage limit might induce bank managers, and owners to
abuse the scheme. Banks might intentionally under-fund the
scheme, counting on additional government resources in times
of crisis. And the secrecy of funds might decrease fund
managers' accountability in societies with little
transparency, and much corruption. In Germany's highly
concentrated commercial banking sector, the small number of
banks facilitates a club atmosphere, and quick resolution of
banking crises. But it could also prevent the entry of new,
innovative market participants, so that the club becomes a
cartel. Germany's anti-bankruptcy bias might help
prevent moral hazard, but can also stifle entrepreneurship.
There is a tradeoff between the efficiency gain of a
privately run deposit insurance scheme, and its potentially
negative impact on competition, and entrepreneurship.
Although the scheme cannot easily be transplanted to
developing countries, it offers lessons for other economies.
Schemes with a club-like character, reinforce peer
monitoring, and minimize the risk of free riding. Risk-based
premiums, based on auditing by the deposit insurance scheme,
create a healthy link between the protection an insurance
offers, and the moral hazard it aims to prevent. One
compromise might be a combination of ex-ante funding, that
guarantees credibility, with depositors, and ex-post bank
funding, that gives banks an incentive to monitor one
another to minimize costs. |
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