Deposit Insurance:
An Annotated Bibliography,
Annual Update
For Calendar Year 2001
Deposit Insurance 
Bibliography
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
DIVISION OF INSURANCE AND RESEARCH I
Deposit Insurance: An Annotated Bibliography,
Annual Update for Calendar Year 2001
Table of Contents
Foreword ii
Acknowledgments iii
Acronyms iv
01. General Deposit Insurance Theory and Policy 1
02. Designing and Establishing Deposit Insurance Systems 2
03. Pricing and Valuation of Insured Depository Institutions 5
04. Regulation and Supervision of Insured Depository Institutions 6
05. Role of Deposit Insurance in Bank Failures 10
06. Economics of Deposit Insurance 11
07. Deposit Insurance and Moral Hazard, Risk, and Incentives 15
08. Safety Nets, Deposit Insurance, and Subsidies 16
09. Deposit Insurance Systems: Country- or Region-Specific 18
10. Deposit Insurance Reform in the United States: Pre-FDICIA 21
11. Deposit Insurance Reform in the United States: Post-FDICIA 22
12. Legal Aspects of Deposit Insurance 25
13. Too Big tOFail 26
14. FDIC-Administered Insurance Funds 28
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
ii FEDERAL DEPOSIT INSURANCE CORPORATION
Foreword
In 2000, the Federal Deposit Insurance Corporation (FDIC) published Deposit Insurance: 
An
Annotated Bibliography, 1989–1999, a compilation of a decade’s worth of deposit 
insurance–
related research into one comprehensive reference source. The Annotated Bibliography is 
part of
the FDIC’s ongoing effort to assist policy makers and regulators around the world in the 
design
and operation of deposit insurance systems and to promote additional research into 
deposit
insurance issues.
This Annual Update of the deposit insurance bibliography contains relevant materials for
calendar year 2001. As per the original and previous updates, this Update includes 
citations and
abstracts for books, journal articles, working papers, dissertations, conference 
proceedings,
congressional hearings, and government and international agency reports that focus on 
deposit
insurance. The Update is available in a printer-friendly portable document format (PDF).
Search and printing instructions are provided. Copies of materials listed in the Update 
can be
obtained from any reference library or through standard interlibrary loan procedures.
Users may refer to the preface of the original edition of the Annotated Bibliography for 
more
details about the purpose, scope, and sources of the bibliography. This information can be 
found
at http://www.fdic.gov/deposit/deposits/international/bibliography/index.html.
KENNETH D. JONES
Senior Financial Economist
STEVEN J. MCGINNIS
Economic Research Assistant
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
DIVISION OF INSURANCE AND RESEARCH III
Acknowledgements
The compliers are once again indebted to Alicia Amiel, Reference Librarian, whose
contributions to the search process were instrumental, and to Jane Lewin, for her editorial
work. Gratitude and recognition is also due Geri Bonebrake for graphic design and page 
layout.
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
iv FEDERAL DEPOSIT INSURANCE CORPORATION
Acronyms
BIS Bank for International Settlements
CDIC Canada Deposit Insurance Corporation
CEC Commission of the European Community
EC European Community
EU European Union
Fannie Mae Federal National Mortgage Association
Freddie Mac Federal Home Loan Mortgage Corporation
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991
FITD Fondo Interbancario di Tutela dei Depositi
GDIA Government Deposit Insurance Agency
GDP Gross Domestic Product
GSE Government-Sponsored Enterprise
IFS International Financial System
IMF International Monetary Fund
MIMIC Mutual Insurance Model with Incentive Compatibility
MMMF Money Market Mutual Fund
NBH National Bank of Hungary
OECD Organization for Economic Co-operation and Development
SADIS South African Deposit Insurance Scheme
TBTF Too Big tOFail
TEK Hellenic Deposit Guarantee Fund
GENERAL DEPOSIT INSURANCE THEORY AND POLICY
DIVISION OF INSURANCE AND RESEARCH 1
Deposit Insurance: An Annotated Bibliography
Annual Update for Calendar Year 2001
1. General Deposit Insurance Theory and Policy
Entries in this section are more general than entries in the other sections, and their
perspective on deposit insurance issues is broader. These entries examine 
governmentprovided
deposit insurance, alternative insurance structures and regimes, historical
background, and budgeting and accounting issues.
Cull, Robert, Lemma W. Senbet, and Marco Sorge. 2001. Deposit Insurance and 
Financial
Development. Policy Research Working Paper no. 2682. The World Bank.
National governments operate formal deposit insurance systems in order to stabilize their
financial and payment systems. However, some economists have argued that deposit
insurance can be socially counterproductive if the system is not appropriately structured
and supported by adequate regulatory environments. In this paper, the authors examine
the long-term effects of deposit insurance on financial development and stability (broadly
defined to include the level of financial activity, the stability of the banking sector, and
real-sector economic performance) in a sample of 58 countries. Overall, the paper’s
findings are consistent with the accepted thinking that deposit insurance schemes
accompanied by sound regulatory environments have a positive effect on financial
development and economic growth. However, the evidence also indicates that in
countries lacking a sound regulatory environment (proxied by quality indices of the rule
of law), the presence of a deposit insurance system could contribute tOFinancial
instability.
Demirgüç-Kunt, Asli, and Enrica Detragiache. 2001. Does Deposit Insurance Increase 
Banking
System Stability? An Empirical Investigation. Policy Research Working Paper no. 2247.
The World Bank.
This study analyzes panel data for 61 countries during 1980-97 and concludes that
explicit deposit insurance tends to be detrimental to bank stability, the more so where
bank interest rates are deregulated and the institutional environment is weak. Also, the
adverse impact of deposit insurance on bank stability tends to be stronger when the
coverage offered to depositors is extensive, when the scheme is funded, and when it is
run by the government rather than by the private sector. (ÆÉ 2001 EconLit)
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
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2. Designing and Establishing Deposit Insurance Systems
Entries in this section discuss international experiences with deposit insurance, various
surveys of international deposit insurance systems and structures, lessons learned, 
emerging
best practices, and prescriptions for designing effective and efficient deposit insurance
systems.
Beck, Thorsten. 2001. Deposit Insurance as Private Club: Is Germany a Model? Policy
Research Working Paper no. 2559. The World Bank.
The 1980s and 1990s have seen a marked increase in the number of countries that use
explicit deposit insurance schemes as part of their government-provided financial safety
net. Yet the benefits of having an explicit public system are not universally accepted.
Indeed, a number of alternative deposit insurance systems—ones where the government’s
guarantee is less explicit or denied entirely—have existed for some time and have been
quite successful. This paper describes and evaluates the deposit insurance scheme set up
by private commercial banks in Germany in 1975. In contrast to many deposit insurance
schemes, the German deposit insurance system is completely private, has no government
supervision, and relies on peer monitoring by its member banks. The author evaluates the
unique characteristics of the German scheme and the financial environment in which it
operates to determine the extent to which it can serve as a model for other countries. He
concludes that the German model might be applicable to developing countries that are
characterized by concentrated banking sectors, provided there exists an institutional
environment that fosters contract enforcement and exhibits a minimum level of
corruption.
Canada Deposit Insurance Corporation (CDIC). 2001. International Conference on 
Deposit
Insurance: Guidance and Future Directions. Conference Proceedings.
The first day of the CDIC international conference focused on guidance for countries
developing deposit insurance systems and on emerging issues and future challenges for
deposit insurers. The second day focused on technical presentations that covered issues
such as premium and funding options, self-assessment methodologies, liquidation and
failure-resolution options, and research priorities for deposit insurers. The final day of
the conference was devoted to a discussion of the latest draft of the Basel II Capital
Accord.
Demirgüç-Kunt, Asli, and Edward J. Kane. 2001. Deposit Insurance around the Globe: 
Where
Does It Work? Policy Research Working Paper no. 2679. The World Bank.
In the late 1990s, several financial and banking crises occurred around the globe. As a
result, a growing number of developing countries have been seeking advice about
designing and adopting an explicit deposit insurance system. Previous research has
DESIGNING AND ESTABLISHING DEPOSIT INSURANCE SYSTEMS
DIVISION OF INSURANCE AND RESEARCH 3
delineated not only the well-known trade-off between banking stability and moral hazard
but also the interaction between deposit insurance design features and country-specific
elements of a country’s financial and governmental contracting environment. This paper
documents the extent of cross-country differences in deposit insurance design and
reviews the empirical evidence on how particular design features affect private market
discipline, banking stability, financial development, and the effectiveness of crisis
resolution. The authors’ findings suggest that countries with institutionally weak
informational, legal, and supervisory environments should refrain from adopting an
explicit deposit insurance system until they assess and remedy any weaknesses in their
environments.
Demirgüç-Kunt, Asli, and Tolga Sobaci. 2001. Deposit Insurance around the World. The
World Bank Economic Review 15, no. 3:481–90.
In the past two decades, in a series of banking crises around the world, banks have
become systematically insolvent. These crises have occurred in developed and
developing economies alike. To make such financial system breakdowns less likely and
to limit their costs if they occur, policymakers feel the need for financial safety nets.
These include such policies as implicit or explicit deposit insurance, a lender of last resort
function of the central bank, bank insolvency resolution procedures, and bank regulation
and supervision. Of these policies, explicit deposit insurance has been gaining popularity
in recent years. Since the 1980s the number of countries with explicit deposit insurance
schemes almost tripled, with most OECD countries and an increasing number of
developing economies adopting some form of explicit depositor protection. In 1994
deposit insurance became the standard for the newly created single banking market of the
European Union. Establishing an explicit deposit insurance scheme became part of the
generally accepted best practice advice given to developing economies. (ÆÉ 2001
EconLit)
Evanoff, Douglas D. 2001. Designing an Effective Deposit Insurance Structure: An
International Perspective. The Federal Reserve Bank of Chicago. ChicagoFed Letter,
no. 167c.
In December 2000, the Federal Reserve Bank of Chicago and the Financial Stability
Forum (an international regulatory and monetary authority created by the Group of 7
industrialized nations in 1998 to study ways of managing risk in the global financial
system) cosponsored a symposium on designing effective deposit insurance systems.
Based on the Financial Stability Forum’s recommendations to countries that were
considering introducing or modifying deposit insurance schemes, the symposium was
intended to generate informed feedback from leading financial and banking economists.
This Letter summarizes the discussion at the symposium and the conclusions that
emerged.
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
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Fondo Interbancario di Tutela dei Depositi (FITD). 2001. Report on Deposit Insurance: 
An
International Outlook. Rome: FITD.
This report focuses on updated data on deposit insurance systems already in place and
describes innovations that have been introduced that may be of use to countries
developing their own deposit insurance systems. Section one of the report presents the
results of an FITD survey of the institutional characteristics of deposit insurance schemes
in 30 countries. The survey results show that though there are some similarities, there are
still many institutional and operational differences among deposit insurers around the
globe. Section two of the report is a speech by Philadelphia Federal Reserve Bank
President Anthony M. Santomero on how deposit insurance in the United States has
evolved and how it currently works.
Hartley, James E. 2001. Mutual Deposit Insurance. The Independent Review 6, no. 
2:235–52.
Should government bank deposit insurance be scrapped in favor of a system of bank
cross-guarantees? Some proponents claim to have found successful cross-guarantees
among the banks of antebellum Indiana, Ohio, and Iowa, but a closer examination
suggests otherwise. (ÆÉ 2001 EconLit)
Kaufman, George G., and Steven A. Seelig. 2001. Post-Resolution Treatment of 
Depositors at
Failed Banks: Implications for the Severity of Banking Crises, Systemic Risk, and Too-
Big-to-Fail. IMF Working Paper no. WP/01/83. International Monetary Fund.
Losses may accrue to depositors at insolvent banks both at and after the time of official
resolution. Losses at resolution occur because of poor closure rules and regulatory
forbearance. Losses after resolution occur if depositors are denied access to their funds—
even temporarily. This paper examines both the sources and the implications of potential
depositor losses in bank resolutions—in particular, depositor losses due to delays in the
payment of legitimate depositor claims. The paper also reports on a special survey of
access practices in deposit insurance schemes around the world and contrasts those with
the policy of immediate access currently followed by the FDIC in the United States. The
paper concludes with “best-practices” recommendations regarding depositors’ access to
their funds at resolved institutions.
PRICING AND VALUATION OF DEPOSIT INSURANCE
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3. Pricing and Valuation of Deposit Insurance
Entries in this section deal with methodologies for calculating deposit insurance 
premiums. In
particular, they explore option pricing theory and its application to deposit insurance 
pricing;
the effects of fixed and risk-adjusted pricing regimes; estimation of actuarially fair 
premiums;
and the market value of deposit insurance guarantees over time.
Dermine, Jean, and Fatma Lajeri. 2001. Credit Risk and the Deposit Insurance Premium: 
A
Note. Journal of Economics and Business 53, no. 5:497–508.
Previous research on market-based evaluation of deposit insurance premia has modeled
the bank as a corporate firm with risky assets and insured liabilities. No attempt was
made to analyze explicitly the risk characteristics of bank assets. The purpose of this note
is to model bank lending explicitly and calculate loan-risk sensitive insurance premia.
The lending function of banks creates the need to model equity as a "capped" call option.
A simulation exercise shows that market-based estimates of deposit insurance premia
which ignore the cap lead to significant underestimation. (ÆÉ 2001 EconLit)
Pennacchi, George G. 2001. Estimating Fair Deposit Insurance Premiums for a Sample of
Banks under a New Long-Term Insurance Pricing Methodology. In The Financial Safety
Net: Costs, Benefits, and Implications for Regulation, Proceedings of the 37th Annual
Conference on Bank Structure and Competition, 756–76. Federal Reserve Bank of
Chicago.
A number of theoretical and empirical studies have applied option pricing methods to
value deposit insurance premiums. However, the research is based on models that
typically specify a single maturity date for the deposit insurance contract. This paper
presents a model for valuing deposit insurance wherein insurance rates are set according
to a moving average of the value of the FDIC’s exposure tOFuture losses. That is, the
methodology involves treating the insurance guarantee as a moving average of several
long-term contracts going forward. In addition to calculating fair premiums, the paper
also calculates what is referred to as “expected-value” premiums under this overlapping
contract or moving-average approach. Expected-value premiums differ from fair-value
premiums in that they do not provide compensation for the insurer’s exposure to systemic
risk. The author holds that this approach results in less volatile insurance premiums and
avoids providing banks with a deposit insurance subsidy. However, this stability comes
at a price: higher fair-value premiums are needed to compensate taxpayers for their
exposure to systemic risk.
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
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4. Regulation and Supervision of Insured Depository Institutions
The entries in this section deal with the regulation and supervision of insured 
depository
institutions: the appropriate role for bank regulation, alternative regulatory structures,
principles of effective regulation, regulatory forbearance and its effect on the cost of 
bank
failures, bank capital regulations, the economic effect of bank regulation, and 
deregulation.
Barth, James R., Gerald Caprio, Jr., and Ross Levine. 2001. Bank Regulation and 
Supervision:
What Works Best? Policy Research Working Paper no. 2725. The World Bank.
This article draws on a unique World Bank database on bank regulation and supervision
in 107 countries to examine the relationship between regulation/supervision on the one
hand and bank performance and financial system stability on the other hand. More
specifically, the authors assess the effect of a number of regulatory and supervisory
practices, including the regulation of bank capital, permissible bank activities,
information disclosure, ownership, the features of deposit insurance schemes, supervisory
power, and level of enforcement. The analysis raises cautionary flags about strategies
that rely excessively on direct government oversight and restrictions on bank activities.
Rather, the regulatory strategies that best promote sector performance and stability are
found to be those that empower the private sector and limit the adverse effects of overly
generous deposit insurance schemes.
Barth, James R., Gerald Caprio, Jr., and Ross Levine. 2001. The Regulation and 
Supervision of
Banks around the World. Policy Research Working Paper no. 2588. The World Bank.
This paper presents and discusses a new database on the regulation and supervision of
commercial banks in 107 countries; included in the database is information on deposit
insurance schemes. The data are drawn from a 1998–99 survey of national supervisory
and regulatory agencies and covers entry and capital requirements, activity and
ownership restrictions, auditing and disclosure requirements, loan classifications and
provisioning regulations, troubled-bank resolution activity, supervisory quality, and a
number of characteristics of deposit insurance schemes. In addition to providing a basic
description of the data, the paper also presents some descriptive statistics, including
alternative groupings and aggregations, as well as some simple correlations among
selected variables. The database is available at the World Bank’s Web site for financial
sector research (http://worldbank.org/research/interest/intrstweb/htm).
Broome, Lissa L., and Jerry W. Markham. 2001. Regulation of Bank Financial Service
Activities: Cases and Materials. West Group.
This book presents a comprehensive overview of banking regulation and law in the
United States and is intended for both academics and practitioners. It covers the history
of banking regulation as well as federal, state, and international regulatory issues. It has
chapters on bank commercial lending; Gramm-Leach-Bliley and its regulatory
implications for the securities, derivatives, and insurance operations of banks; the
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regulation of thrifts and credit unions; trust activities; geographic expansion, mergers,
and antitrust; bank liabilities and capital; and supervision, enforcement, and failed-bank
resolution.
Elifoglu, I. Hilmi, and James W. Thompson. 2001. When May Examiners Review 
External
Auditors’ Workpapers? Bank Accounting and Finance 14, no. 2:51–58.
This article summarizes the key elements of the Memorandum (Transmittal 00-19),
Reviews of External Auditors’ Workpapers, that the FDIC issued on March 21, 2000.
The memorandum provides guidance to examiners on situations in which they should
review the workpapers prepared by an insured depository institution’s external auditor.
Feldman, Ron, and Mark Levonian. 2001. Market Data and Bank Supervision: The 
Transition
to Practical Use. Federal Reserve Bank of Minneapolis Region 15, no. 3:11–13, 46–54.
Economic research conducted over the last several years has shown that market prices
contain information on the riskiness of banking organizations. Can bank supervisors use
this information to enhance their assessment of a bank’s financial condition? The authors
of this essay argue that they can and should. Specifically, the authors offer three ways in
which market data should be routinely used in the supervisory process: (1) to help
supervisors assess the overall condition of banking institutions, (2) to help them assess
the quality of loans and capital, and (3) tOFacilitate supervisory responses to institutional
risk taking. Moreover, the authors recommend that despite some inherent difficulties in
using market data, bank supervisors should move quickly to broaden their use of this
information so as to gain practical knowledge about the data’s strengths and weaknesses
and about the best way of using the data to improve the supervisory process.
Garten, Helen A. 2001. U.S. Financial Regulation and the Level Playing Field. Palgrave.
Why have financial modernization and regulatory reform in the United States never led to
regulatory simplification? This book attempts to answer that question by examining the
forces that drive the U.S. regulatory process. In particular, the author offers an
explanation for the apparent contradiction between the United States' stated commitment
tOFreer and more open financial markets and the fact that the nation’s financial markets
really do not appear all that open or free. In brief, her explanation is that regulation is
legitimized to the extent that it improves the competitive fairness that U.S. financial
market players demand from their system. Several examples of how regulation is being
used tOFurther the competitive fairness of U.S. financial markets are provided.
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
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Hall, Maximilian J. B., ed. 2001. The Regulation and Supervision of Banks. Volume 1: 
The
Case for and Against Banking Regulation. Volume 2: Deposit Insurance. Volume 3:
The Regulation of Bank Capital. Volume 4: Regulation and Efficiency in Banking. JAI
Press.
This is a four-volume reference collection of articles about the regulation of banks.
Volume 1 covers (a) the cases for and against banking regulation, and (b) the design of an
“optimal” regulatory framework. Volume 2 examines arguments for and against the
adoption of deposit insurance as well as the problems that may occur in implementing a
deposit insurance scheme. Volume 3 explores the issue of capital adequacy assessment,
touching on the role played by capital and capital regulation and on the assessment of
capital adequacy at international banks. Volume 4 deals with the links between
regulation and efficiency in banking.
Maclachlan, Fiona C. 2001. Market Discipline in Bank Regulation: Panacea or Paradox?
Independent Review 6, no. 2:227–34.
Central bankers often speak of the three pillars supporting the safety and soundness of the
banking system: regulation, supervision, and, increasingly, market discipline.
Paradoxically, many recent proposals intended to improve market discipline would in fact
undermine it by giving rise to counterproductive regulatory discretion. (ÆÉ 2001 
EconLit)
Mishkin, Frederic S., ed. 2001. Prudential Supervision: What Works and What Doesn’t.
University of Chicago Press.
This volume contains a collection of papers and comments presented at a conference held
by the National Bureau of Economic Research in January 2000. Papers include
“Prudential Supervision: Why Is It Important and What Are the Issues,” by Frederic S.
Mishkin; “Banking Systems around the Globe: Do Regulation and Ownership Affect
Performance and Stability?” by James R. Barth, Gerard Caprio, Jr., and Ross Levine;
“Supervising Large Complex Banking Organizations: Adapting to Change,” by Laurence
H. Meyer; “Market Discipline in Governance of U.S. Bank Holding Companies:
Monitoring versus Influencing,” by Robert R. Bliss and Mark J. Flannery; “Can
Emerging Market Bank Regulators Establish Credible Discipline? The Case of
Argentina, 1992–99,” by Charles W. Calomiris and Andrew Powell; “Dimensions of
Credit Risk and Their Relationship to Economic Capital Requirements,” by Mark Carey;
“Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank
Supervision and Regulation Reforms,” by Randall S. Kroszner and Philip E. Strahan;
“Synergies between Bank Supervision and Monetary Policy: Implications for the Design
of Bank Regulatory Structure,” by Joe Peek, Eric S. Rosengren, and Geoffrey M. B.
Tootell; and “Did U.S. Bank Supervisors Get Tougher during the Credit Crunch? Did
They Get Easier during the Banking Boom? Did It Matter to Bank Lending?” by Allen
N. Berger, Margaret K. Kyle, and Joseph M. Scalise.
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Norton, Joseph J. 2001 Selective Bank Regulatory and Supervisory Trends upon Entering 
the
21st Century. Essays in International Financial and Economic Law, no. 34. London
Institute of International Banking and Development Law.
The first part of this three-part essay examines the environment facing the banking
industry and bank supervisors. Special attention is paid to the debate about the structural
context of bank supervision, the increasingly legislative nature of modern financial sector
reform, the increasing globalization of financial services, and the pursuit of an
international financial architecture. The second part of the essay discusses specific
supervisory trends, such as the idea of a supervisory “public-private partnership,” the
redefinition of the “business of banking,” and the regulatory issues raised by the
existence of large, complex banks. The focus of the final part of the essay is on the need
to create more-advanced “portfolio credit risk” approaches to bank supervision and the
challenges to doing so.
Walker, George Alexander. 2001. International Banking Regulation: Law, Policy, and
Practice. Kluwer Law International.
This book examines the current regulatory framework for international banks. It details
the story of the collective efforts of national regulatory authorities to deal with the threats
to a single global financial market and to reduce the risks of systemic crisis. It recounts
the financial crises of the past 25 years and discusses the regulatory responses to them,
beginning with the establishment of the Basel Committee on Banking in 1975.
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5. Role of Deposit Insurance in Bank Failures
Entries in this section focus on bank failures and the role deposit insurance played in 
those
failures: the underlying causes of bank crises, failed-bank resolution methods, bank 
closure
rules, the costs of failed-bank resolutions, and historical perspectives on the U.S. 
savings and
loan debacle and the commercial bank crisis of the 1980s and early 1990s.
Bennet, Rosalind L. 2001. Failure Resolution and Asset Liquidation: Results of an 
International
Survey of Deposit Insurers. FDIC Banking Review 14, no. 1:1–28.
In January 2000, the FDIC surveyed 73 foreign deposit insurance agencies regarding
their failure-resolution and asset-liquidation practices. This article reports on the nature
and extent of those practices and compares them with the resolution policies and
practices of the FDIC. The comparison indicates that the FDIC is uniquely empowered
to act expeditiously in resolving bank failures, in disposing of failed-bank assets, and in
reimbursing insured depositors. The author suggests that some of the failure-resolution
techniques developed by the FDIC might be effectively applied in other countries.
ECONOMICS OF DEPOSIT INSURANCE
DIVISION OF INSURANCE AND RESEARCH 11
6. Economics of Deposit Insurance
Entries in this section are more academic and focus on the following: bank risk taking,
managerial incentives, bank stability, portfolio choice, charter values and shareholder 
return,
and bank capital regulation. Also discussed are the costs and benefits of deposit 
insurance.
Grossman, Richard S. 2001. Double Liability and Bank Risk Taking. Journal of Money, 
Credit
and Banking 33, no. 2:144–59.
This article examines double liability as it existed in the United States before the
establishment of federal deposit insurance and assesses whether banks in states with
double-liability laws undertook less risk than banks in states operating under
conventional limited liability. The author finds that in times of relative financial calm,
double liability was consistent with reduced bank risk taking (as evidenced by higher
capital ratios and liquidity ratios) and lower failure rates. During times of severe
financial disruption, however, double liability seems not to have contributed tOFinancial
stability. In fact, during tumultuous financial times, double liability seems to have been
associated with greater levels of instability.
Hanousek, Jan, and Richard Podpiera. 2001. Detekce bankovnich selhani v tranzitivnich
ekonomikach: Pripad CR (Detection of Bank Failures in Transition Economies: The Case
of the Czech Republic). [With English summary.] Finance A Uver 51, no. 5:252–64.
This paper studies bank-failure models in the context of transition economies. In order to
capture the default risk of banks, data on the structure of retail deposit rates is used to
improve the prognostic quality of bank-failure prediction. The Czech bank crisis of 1994-
1996, during which 14 banks failed, is used to verify the suggested approach. It is shown
that banking supervision did not have—most likely given the low quality of the available
accounting data—better information with respect tOForetelling bank failures than the
general public did via retail interest rates. In addition, the combination of balance-sheet
and interest-rate data significantly improves the quality of bank-failure prediction. Thus,
the utilization of information related to interest rates can increase the efficiency of
banking supervision and can provide early warning signals of bank failures. (ÆÉ 2001
EconLit)
Kahn, Charles M., and João A. C. Santos. 2001. Allocating Bank Regulatory Powers: 
Lender of
Last Resort, Deposit Insurance, and Supervision. BIS Working Papers no. 102. Bank for
International Settlements.
In this paper the authors examine the institutional allocation of the regulatory functions of
lender of last resort, deposit insurance, and supervision. The authors argue that because
these functions are interrelated, they require coordination among regulatory agencies
whose mandates may be in conflict. By focusing on the interplay between the allocation
of these powers and the design of both the deposit insurance scheme and the lending
contract used by the lender of last resort, the authors find that having these functions
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
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performed by a single regulator leads to insufficient bank monitoring and suboptimal
bank investment in loans. It may also lead to too much forbearance. Under alternative
structures, however, the authors’ model shows that it is feasible to specify an optimal
arrangement of regulatory authority that overcomes these problems.
Kocherlakota, Narayana R. 2001. Risky Collateral and Deposit Insurance. Advances in
Macroeconomics 1, no. 1:1–18.
This paper provides a new rationalization for deposit insurance and systemic
disintermediations. The author considers an environment in which borrowers face no
penalty for failing to repay obligations except the loss of their collateral under the
assumption that this collateral has aggregate risk. For a subset of the exogenous
parameters, the author demonstrates that an optimal arrangement features deposit
insurance. For a strictly smaller set of parameters, it is optimal in some states of the world
to have systemic distintermediations and concomitant falls in real output. (ÆÉ 2001
EconLit)
Luzio-Antenzana, Rodolfo Santiago. 2001. Market Discipline, Asymmetric Information 
and
Banking Regulation: An Application to Bolivia. Ph.D. diss., University of Chicago.
This dissertation examines whether market supervision by depositors could control risk
taking and play an important role in government regulatory policy. Data from Bolivian
banks is used to study the heterogeneity of deposit interest rate premia and net flows
across banks in the presence of deposit insurance. The author traces the heterogeneity to
fundamental attributes of banks that determine the risk exposure of deposits to the
possibility of bank default. A private information model of bank asset and liability
management is developed that helps to explain the heterogeneity of deposit interest rates
and flows across banks in the context of asymmetric information between depositors and
bank insiders when partial deposit insurance is present. The author finds that “good”
banks signal their status as “good” by holding a large portion of low-risk, liquid assets.
This not only differentiates them from “bad” banks but also lowers their financing costs
and results in their getting a higher share of deposits. Empirical evidence supporting the
presence of adverse selection in the market for bank debt in Bolivia is also presented.
Martin, Antoine. 2001. Liquidity Provision vs. Deposit Insurance: Preventing Bank 
Panics
without Moral Hazard? Working Paper no. RWP 01-05. Federal Reserve Bank of
Kansas City.
It is widely recognized that deposit insurance can lead to excessive risk taking by
banks—a problem known as moral hazard. This paper develops a model to analyze
whether a central-bank policy of providing liquidity to banks during panics can prevent
bank runs without causing moral hazard. The model contains three key features: (1) bank
panics may occur in equilibrium, (2) moral hazard can occur, (3) the central bank can
create more money that is readily held. The results show that a central-bank repurchase
policy provides liquidity to the banking system that can prevent panics without causing
ECONOMICS OF DEPOSIT INSURANCE
DIVISION OF INSURANCE AND RESEARCH 13
moral hazard. In contrast, the results also indicate that deposit insurance, although
capable of preventing runs, does create moral hazard.
Miles, William. 2001. Can Money Market Funds Provide Sufficient Liquidity to Replace
Deposit Insurance? Journal of Economics and Finance 25, no. 3:328–42.
Narrow banking is an arrangement in which deposit-taking and lending functions are
separated and performed by different institutions. This separation is aimed at avoiding
panics at uninsured banks, without the moral hazard associated with deposit insurance.
Money Market Mutual Funds (MMMFs) are promoted as replacements for bank deposits.
For MMMFs to compete with banks, they must be able to withstand a monetary shock
without losing shareholders in a flight to quality at government-insured institutions. VAR
analysis indicates that MMMFs increase share issue subsequent to a monetary tightening.
This bolsters the case that liquidity can be provided in a narrow banking framework. 
(ÆÉ
2001 EconLit)
Peria, Maria Soledad Martinez, and Sergio L. Schmukler. 2001. Do Depositors Punish 
Banks
for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises. The
Journal of Finance 56, no. 3:1029–51.
This paper empirically investigates two issues largely unexplored by the literature on
market discipline. Specifically, the authors evaluate the interaction between market
discipline and deposit insurance and the impact of banking crises on market discipline.
Focusing on the experiences of Argentina, Chile, and Mexico during the 1980s and
1990s, the authors find that depositors discipline banks by withdrawing deposits and by
requiring higher interest rates. Deposit insurance does not appear to diminish the extent
of market discipline. Aggregate shocks affect deposits and interest rates during crises,
regardless of bank fundamentals, and investors' responsiveness to bank risk taking
increases in the aftermath of crises. (ÆÉ 2001 EconLit)
Perotti, Enrico C., and Javier Suárez. 2001. Last Bank Standing: What Do I Gain If You 
Fail?
Discussion Paper no. 2933. Center for Economic Policy Research.
Banks’ attitude towards speculative lending is typically regarded as the result of 
tradingoff
the short-term gains from risk-taking against the risk of loss of charter value. In this
paper, the authors study the trade-off between stability and competition in a dynamic
setting where charter value depends on future market competition. Promoting the
takeover of failed banks by solvent institutions results in greater market concentration
and larger rents for the surviving incumbents. This converts banks' speculative lending
decisions into strategic substitutes, granting an additional incentive to remain solvent.
Entry policy may subsequently serve tOFine-tune the trade-off between competition and
stability. (ÆÉ 2001 EconLit)
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
14 FEDERAL DEPOSIT INSURANCE CORPORATION
Souma, Toshiyuki. 2001. Efficient Lending and a New Aspect of Government Deposit
Insurance Agency. Osaka Economic Papers 3, no. 1:1–21.
The number of insolvent banks in Japan has increased substantially in recent years.
Common wisdom is that insolvent banks should be liquidated immediately. This paper
questions the wisdom of immediate liquidation of insolvent banks because it results in a
loss of funding not only for projects with negative net present values but alsOFor projects
with positive present values. To determine what types of agents must loan funds to an
insolvent bank in order to prevent the bank from engaging in inefficient lending, the
author uses a model in which an insolvent bank borrows funds and lends, regardless of a
project’s return. The author shows that financing from a government deposit insurance
agency (GDIA) can make a bank’s lending efficient. This finding contradicts those from
a number of other studies in which the existence of a GDIA encouraged a bank to take
too much risk. The paper also shows that efficient lending can be achieved regardless of
the total deposits to be insured.
Zhu, Haibin. 2001. Bank Runs, Welfare and Policy Implications. BIS Working Paper no. 
107.
Bank for International Settlements.
The banking sector is naturally vulnerable to bank runs because banks issue liquid
liabilities but invest in illiquid assets. This paper puts forward a model in which bank
runs are closely related to the condition of the business cycle. In a market economy, the
basic model shows that bank runs result in welfare costs. Extensions of the model
examine the welfare effects of certain government policies aimed at preventing bank
runs. The results show that an interest-cap deposit insurance scheme is an efficient
policy for the prevention of bank runs, whereas other policies (such as the suspension of
convertibility, an interest-rate penalty on short-term deposits, or a full coverage deposit
insurance scheme) result in adverse side effects.
DEPOSIT INSURANCE AND MORAL HAZARD, RISK, AND INCENTIVES
DIVISION OF INSURANCE AND RESEARCH 15
7. Deposit Insurance and Moral Hazard, Risk, and Incentives
Entries in this section deal with the moral-hazard problem caused by the provision of 
deposit
insurance, methods of mitigating the problem, the effect of deposit insurance on bank 
risktaking
behavior and on the incentives of bank management, and the principal–agent problem
in bank regulation.
Gropp, Reint, and Jukka Vesala. 2001. Deposit Insurance and Moral Hazard: Does the
Counterfactual Matter? European Central Bank Working Paper Series no. 47. European
Central Bank.
This paper analyzes the relationship (for European banks) between deposit insurance and
debt-holder monitoring, bank charter values, and risk taking. Using cross-sectional and
time-series variation about deposit insurance schemes in the European Union, the authors
find that the establishment of explicit deposit insurance significantly reduces the risk
taking of banks. This finding is in sharp contrast to the long-standing belief that deposit
insurance induces moral hazard. The authors explain this anomaly by suggesting that
even though European banking systems formerly did not have explicit deposit insurance
schemes, they were characterized by strong implicit deposit insurance operating through
expectations of public intervention during times of distress. Hence, the introduction of an
explicit system may imply a de facto reduction in the scope of the financial safety net. In
addition, the authors test hypotheses about the interaction between deposit insurance and
debt-holder monitoring, charter values, and “too big tOFail” and find that banks with
more subordinated debt and lower charter values reduce risk taking more after the
introduction of explicit deposit insurance. “Too-big-to-fail” problems, however, are not
found to be mitigated after the introduction of explicit deposit insurance.
Osborne, Dale K., and Seokwon Lee. 2001. Effects of Deposit Insurance Reform on 
Moral
Hazard in US Banking. Journal of Business Finance and Accounting 28, nos. 7–8:979–
92.
Previous empirical studies have found that larger banks and banks with lower charter
values or capital levels tend to increase the riskiness of their portfolios when deposit
insurance is present. Reforms enacted as part of FDICIA (enacted in 1991 and fully
implemented in 1993) were designed to combat such moral-hazard behavior. In this
article, the authors test the effect of deposit insurance reform on the moral-hazard
behavior of banks. Specifically, the authors compare the pre- and post-reform
associations between bank risk taking and bank charter value, bank size, and bank
capital—three variables previously found to play an important role in the moral hazard
induced by deposit insurance. As hypothesized, the authors find that the associations
between systematic risk and charter value and asset size are significantly weaker after
deposit insurance reform. The association between systematic risk and capital is also
found to be weaker, but the change is not statistically significant. The authors see this
finding as evidence that reform has indeed reduced the moral hazard created by
government-provided deposit insurance.
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16 FEDERAL DEPOSIT INSURANCE CORPORATION
8. Safety Nets, Deposit Insurance, and Subsidies
Entries in this section include works on bank safety nets in general and deposit 
insurance in
particular. Also covered are the costs and benefits of official government safety nets, 
the
existence of safety net–related banking subsidies and their competitive implications, 
and
policies for containing such subsidies.
Carnell, Richard Scott. 2001. Federal Deposit Insurance versus Federal Sponsorship of 
Fannie
Mae and Freddie Mac: The Structure of Subsidy. In The Financial Safety Net: Costs,
Benefits, and Implications for Regulation, Proceedings of the 37th Annual Conference on
Bank Structure and Competition, 118–32. Federal Reserve Bank of Chicago.
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) are government-sponsored enterprises (GSEs)—
privately owned profit-oriented corporations with federal charters and a public mission to
develop and improve the secondary market for residential mortgage loans. Because of
their public mission, these GSEs receive a variety of government benefits, including
exemption from federal corporate income taxes. More importantly, the GSEs derive a
cost-of-funds advantage that stems from capital market participants’ perception that the
securities issued by the GSEs carry an implicit government guarantee. This article
describes the federal government’s sponsorship of Fannie Mae and Freddie Mac and
recounts the firms’ recent attempts—by depicting federally insured depository
institutions as GSEs—to deflect the criticism that the government gives these GSEs
overly generous benefits. The article then outlines six structural reasons that federal
sponsorship of Fannie Mae and Freddie Mac, with their perceived implicit guarantee,
tends to impart a greater net government subsidy than does explicit federal deposit
insurance.
Cerda, Oscar, Elijah Brewer III, and Douglas D. Evanoff. 2001. The Financial Safety 
Net:
Costs, Benefits, and Implications. The Federal Reserve Bank of Chicago. ChicagoFed
Letter (Special Issue), no. 171a.
On May 9–11, 2001, the Federal Reserve Bank of Chicago hosted its 37th annual
Conference on Bank Structure and Competition. This year’s conference focused on the
implications of the various explicit and implicit financial safety nets, ranging from
deposit insurance and subsidies to government-sponsored enterprises (GSEs) to the
notion that some financial institutions are “too big tOFail.” This Letter summarizes some
of the issues discussed at the conference by the keynote speaker and by special discussion
panels composed of subject-matter experts from academia and government regulatory
agencies.
Federal Reserve Bank of Chicago. 2001. The Financial Safety Net: Costs, Benefits, and
Implications for Regulation, Proceedings of the 37th Annual Conference on Bank
Structure and Competition. Federal Reserve Bank of Chicago.
Conference proceedings include topics such as Financial Safety Net Issues; GSEs: Their
Impact on Markets; The Effects of Bank Consolidation and Expansion; The Role of
Banking Relationships; Bank Business Strategies; Bank Risk and Capital Issues;
SAFETY NETS, DEPOSIT INSURANCE, AND SUBSIDIES
DIVISION OF INSURANCE AND RESEARCH 17
Financial Crisis and Contagion; Perusing Regulatory Reform; Regulatory Incentive
Alignment; and Alternative Deposit Insurance Structures. Papers related to deposit
insurance include “Community Banking Institutions, Deposit Insurance Reform, and Too
Big tOFail,” by Kenneth A. Guenther; “Controlling the Safety Net,” by Laurence H.
Meyer; “Recommendations for the Changes in the Way Federal Deposit Insurance Is
Funded,” by Arthur J. Murton; “Deposit Insurance and Moral Hazard,” by Asli
Demirgüç-Kunt and Enrica Detragiache; “Issues in Deposit Insurance Reform,” by James
A. Wilcox; “Allocating Bank Regulatory Powers: Lender of Last Resort, Deposit
Insurance, and Supervision,” by Charles M. Kahn and João A. C. Santos; “Developing
Effective Deposit Insurance Systems,” by J. P. Sabourin; “How Good Are EU Deposit
Insurance Schemes?” by Maximilian J. B. Hall; “Designing Financial Safety Nets for
Countries in Different Circumstances,” by Edward J. Kane; and “Estimating Fair Deposit
Insurance Premiums for a Sample of Banks under a New Long-Term Insurance Pricing
Methodology,” by George G. Pennacchi.
Kane, Edward J. 2001. Financial Safety Nets: Reconstructing and Modeling a 
Policymaking
Metaphor. Journal of International Trade and Economic Development 10, no. 3:237–73.
This paper explains that financial safety nets exist because of difficulties in enforcing
contracts and shows that elements of deposit-insurance schemes differ substantially
across countries. It shows that differences in the design of financial safety nets correlate
significantly with differences in the informational and contracting environments of
individual countries and that a country's GDP per capita is correlated with proxies for a
country's level of: (1) informational transparency, (2) contract enforcement and deterrent
rights, and (3) accountability for safety net officials. The analysis portrays deposit
insurance as a part of a country's larger safety net and contracting environment. This
means that there is no universal method for preventing and resolving banking problems
and that the structure of a country's safety net should evolve over time with changes in
private and government regulators' capacity for valuing financial institutions, disciplining
risk taking and resolving insolvency promptly, and for being held accountable for how
well they perform these tasks. (ÆÉ 2001 EconLit)
Kane, Edward J. 2001. Using Disaster Planning to Optimize Expenditures of Financial 
Safety
Nets. Atlantic Economic Journal 29, no. 3:243–53.
Using a multiperiod model, this paper offers a benchmark standard for efficient safety net
management. This standard embodies a market-mimicking strategy for identifying,
preventing, and resolving bank insolvencies. Around the world, governmental reluctance
to acknowledge weaknesses in their crisis prevention efforts supports an underinvestment
in contingent plans for handling financial disaster. The model features the hypothesis that
this underinvestment misserves taxpayers by increasing the ability of stakeholders in
insolvent banks to extract implicit and explicit subsidies when and as the threat of an
actual crisis intensifies. (ÆÉ 2001 EconLit)
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18 FEDERAL DEPOSIT INSURANCE CORPORATION
9. Country- or Region-Specific
Entries in this section focus on deposit insurance in a specific country or region and 
cover the
following: country-specific descriptions of deposit insurance systems, comparative 
surveys,
international experiences with deposit insurance systems, and banking and deposit 
insurance
reforms outside of the United States.
Dar, Humayon A., Maximilian J. B. Hall, and Dadang Mujawan. 2001. A Strategic 
Design of
Islamic Banking Regulations. Middle East Business and Economic Review 13, no. 2:28–
38.
It is important for sound operation of an Islamic banking system to have a set of
prudential regulations that not only protect and promote fundamentals of Islamic banking
but also bridge the gap between Islamic and conventional banking styles. There is a lot in
common between the two systems, which makes it easy to apply some principles of
western banking supervision to Islamic banks. The regulators should also recognize the
difference between theory and practice of Islamic banking while devising regulatory
framework for Islamic banks. This paper proposes that prudential regulations for Islamic
banks should aim at achieving two objectives. First, they should accommodate the issue
of practicality in order to promote soundness of Islamic banking operations, which have
moved away from its perfect paradigm. Second, they should provide right incentives so
that the players are encouraged to embrace the perfect paradigm of Islamic banking in the
future. (ÆÉ 2001 EconLit)
Hall, Maximilian J. B. 2001. How Good Are EU Deposit Insurance Schemes in a Bubble
Environment? In Research in Financial Services: Private and Public Policy, edited by
George G. Kaufman, vol. 13, 145–93. JAI Press.
In the wake of the EU member states’ adoption in 1994 of the EC Deposit Guarantee
Schemes Directive, most EU member states were forced to either introduce a deposit
insurance system or modify their existing scheme to comply with the new community
legislation. This article examines the main features of the deposit insurance schemes now
operated in the 15 members states of the European Union and assesses the extent to
which, individually, they comply with “best-practice” rules for explicit deposit insurance
systems as promulgated by the International Monetary Fund. Using what he describes as
a “relatively crude but nevertheless objective measure of the extent of such compliance,”
the author ranks the member states and compares the results with the ratings achieved by
the deposit insurance systems operating in the United States and Japan. The comparison
indicates that all schemes operated by member states compare poorly with their North
American counterpart. The main factors responsible for depressing the EU scores are the
failure to adopt prompt corrective action provisions, the failure of most nations to impose
co-insurance on depositors, overgenerous levels of protection, and the failure to commit
to the recommended timetable for reimbursing depositors. The author submits, however,
that some of these failings partly reflect the errors and omissions contained in the guiding
EC directive.
COUNTRY- OR REGION-SPECIFIC
DIVISION OF INSURANCE AND RESEARCH 19
Hellenic Deposit Guarantee Fund (TEK). 2001. Hellenic Deposit Guarantee Fund. TEK.
This publication provides depositors and researchers with comprehensive information
about the role and functions of the Greek deposit insurance scheme, the Hellenic Deposit
Guarantee Fund (TEK). The publication explains the management of the TEK, sources of
financing and revenue, coverage levels and eligible deposits, obligations of participating
credit institutions, supervision of the TEK, cooperation with the deposit guarantee
schemes of other countries, and the current status of and future outlook for the TEK. 
(ÆÉ
2001 EconLit)
Kopecky, Ondrej. 2001. Bankovni regulace v mezivalecnem Ceskoslovensku (Banking
Regulation in Czechoslovakia 1918–1938.) [With English summary.] Finance a Uver
51, no. 5:280–98.
The article surveys the establishment of a legislative framework providing for banking
regulation in Czechoslovakia during 1918-38. The state intervened in bank sanitation
twice during economic recessions in the early 1920s and 1930s. The shocks resulted in
the adoption of banking laws to strengthen the stability of the banking sector. The laws
interfered with the internal organization of banks, compelled personal responsibility on
the part of bank management, protected creditors, and supported inexpensive credit. The
Ministry of Finance supervised and pursued license policies. Other control activities were
delegated to autonomous professional institutions. The article goes into great detail in
describing the development of the areas mentioned above, and concludes in presenting an
estimate of state assistance related to sanitation waves. (ÆÉ 2001 EconLit)
Okeahalam, Charles C., and Tudor Maxwell. 2001. Deposit Insurance Design and Bank
Regulation in South Africa. Journal of Financial Regulation and Compliance 9, no.
2:139–50.
Many nations have established explicit deposit insurance systems to prevent bank runs
and to mitigate the economic costs associated with individual bank failures. Experience
has shown, however, that explicit deposit insurance can increase the risk-taking behavior
of banks. In this article, the authors explore the implications of the relationship between
deposit insurance design and bank system stability. They then relate this to the recent
history of bank failure in South Africa. Finally, they describe the development and
testing of a model of the proposed South African Deposit Insurance Scheme (SADIS).
Szapary, Gyorgy. 2001. Banking Sector Reform in Hungary: Lessons Learned, Current 
Trends
and Prospects. NBH Working Paper no. 2001/5. National Bank of Hungary.
Hungary was the first of the Central and Eastern European Countries to begin reforming
its banking system. This paper first reviews the history of reform and current trends in
the Hungarian banking system and then draws some lessons that may be useful for
countries in the early stages of the reform process. The paper makes the specific point
that, when state enterprises are in poor condition, it is essential that the restructuring of
banks be concurrent with the restructuring of state enterprises.
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
20 FEDERAL DEPOSIT INSURANCE CORPORATION
Thomson, Di, and Malcolm Abbott. 2001. Banking Regulation and Market Forces in 
Australia.
International Review of Financial Analysis 10, no. 1:69–86.
The purpose of this paper is to use Kane's notion of the regulatory dialectic to analyze the
changing nature of bank regulation in Australia. Throughout Australia's economic
history, economic regulation of the Australian banking system has not been static but has
responded to changes in technology, market forces, and the behavior of regulated
institutions. From this analysis, some inferences about general banking principles and
policy can be made. (ÆÉ 2001 EconLit)
Walker, David, and Pongsak Hoontrakul. Transitioning from Blanket to Limited Deposit
Guarantees: Thailand Policy Considerations. Sasin Journal of Management 7,
Supplement.
This article proposes a two-tiered deposit insurance system model for Thailand’s banking
system similar to those used by the Canada Deposit Insurance Corporation (CDIC) and
the Federal Deposit Insurance Corporation (FDIC). The first tier of the system would be
compulsory and publicly administered and would provide deposit protection for low
levels of bank deposits in the same manner as the FDIC and CDIC do. The second tier
would be similar to the public/private system that is used in Germany to provide
voluntary additional protection for high-coverage-level bank deposits not covered by the
public system.
Yang, Jiacai. 2001. Cun Huan Bao Xian Zhi Du Ji Zhongguo Mo Shi. Zhonggu Jin Ron 
Chu
Ban She.
This book explores whether China has the market basis for the establishment of a deposit
insurance system. The first chapter examines the theoretical foundation for deposit
insurance systems. The second chapter is an overview of the operating characteristics
and achievements of deposit insurance systems in other countries and territories. The
third chapter explains market foundations for developing a deposit insurance system in
China. The fourth chapter proposes a design for a deposit insurance system with Chinese
characteristics, and the fifth chapter addresses moral hazard and the moral corruption that
could result from the adoption of such a system.
DEPOSIT INSURANCE REFORM IN THE UNITED STATES: PRE-FDICIA
DIVISION OF INSURANCE AND RESEARCH 21
10. Deposit Insurance Reform in the United States: Pre-FDICIA
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was passed in
December 1991. Entries in this section were published before or soon after its passage 
and
describe the problems and weaknesses of the pre-FDICIA deposit insurance system.
Highlighting the need for reform, these entries contain numerous recommendations 
for
reforming, if not abolishing or privatizing, deposit insurance.
NO ENTRIES
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
22 FEDERAL DEPOSIT INSURANCE CORPORATION
11. Deposit Insurance Reform in the United States: Post-FDICIA
Entries in this section were published after passage of the FDICIA reform legislation 
in
December 1991. They include overviews of that legislation; periodic assessments of its
application and effectiveness, weaknesses and shortcomings, and effect on bank 
operations
and incentive structures; discussions of continuing problems with bank regulation and 
deposit
insurance; and recommendations for additional reforms.
Akhigbe, Aigbe, and Ann Marie Whyte. 2001. The Impact of FDICIA on Bank Returns 
and
Risk: Evidence from the Capital Markets. Journal of Banking and Finance 25, no.
2:393–417.
This study examines the effect of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) of 1991 on bank stock returns and risk. The authors find that
FDICIA had a generally positive effect on bank stock returns and resulted in a significant
reduction in bank risk. The extent of the risk reduction varies based on the capitalization,
size, and credit risk of the institutions with poorly capitalized, large, and high credit risk
banks experiencing the greatest risk reduction. The results obtained using two separate
control groups also bolster the conclusion that FDICIA's passage resulted in a significant
decline in bank risk. (ÆÉ 2001 EconLit)
Kaufman, George G. 2001. Reforming Deposit Insurance—Once Again. Federal Reserve 
Bank
of Chicago. ChicagoFed Letter 171
In 2001 the FDIC published two papers on deposit insurance reforms. The first singled
out provisions of the current deposit insurance structure that the FDIC believed needed to
be revisited, and the second presented the FDIC’s recommendations for changes to those
provisions. This ChicagoFed Letter describes the current structure of deposit insurance
and discusses some of the provisions that the FDIC wanted reexamined.
Kaufman, George G., and Peter J. Wallison. 2001. The New Safety Net. Regulation 24, 
no.
2:28–35.
Following the costly banking and thrift crises of the 1980s and early '90s, the United
States dramatically reformed the federal government safety net for depository
institutions, which economists blamed for the outbreak and high cost of the crises. The
reforms, highlighted by the 1991 Federal Deposit Insurance Corporation Improvement
Act, curtailed poor agency behavior by federal regulators, curtailed the notion that the
federal government would "bail out" uninsured depositors of large or politically 
wellconnected
banks, and decreased abuse of Fedwire and Federal Reserve Lending.
However, other reforms are still needed to limit moral hazard behavior and to make the
banking industry, itself, responsible for the health of individual banks. (ÆÉ 2001 
EconLit)
DEPOSIT INSURANCE REFORM IN THE UNITED STATES: POST-FDICIA
DIVISION OF INSURANCE AND RESEARCH 23
Thomson, James B. 2001. Who Benefits from Increasing the Deposit Insurance Limit? 
Federal
Reserve Bank of Cleveland. Economic Commentary (September).
This article explores issues related to the notion of raising the federal deposit insurance
limit to $200,000, and particularly the issues of which parties would benefit from
increases in the limit and would the benefits be consistent with the social objectives of
deposit insurance. Potential benefits to three groups are examined: stakeholderdepositors,
community banks, and taxpayers. The author argues that if the social
objective of deposit insurance is to protect small savers, there is little justification for
raising the coverage limit. However, raising the coverage limit might have positive
social-welfare effects if the objective is to level the playing field between small and large
banks. The author also contends that there is little evidence that taxpayers would benefit
from increases in the limit; the experience of the 1980s suggests they might even be
harmed. Finally, in summarizing, the author raises the question of whether government
intervention is still necessary, given all the advances in information and technology and
the financial market reforms enacted in the 1990s.
U.S. House. 2001. Subcommittee on Financial Institutions and Consumer Credit of the
Committee on Banking and Financial Services. Deposit Insurance Reform: Hearing.
107th Cong., 1st sess., May 16.
Witnesses include David Bochnowski, Robert I. Gulledge, James E. Smith, and Hon.
Donna Tanoue.
U.S. House. 2001. Subcommittee on Financial Institutions and Consumer Credit of the
Committee on Banking and Financial Services. Viewpoints of Select Regulators on
Deposit Insurance Reform: Hearing. 107th Cong., 1st sess., July 26.
Witnesses include Hon. Sheila C. Blair, Hon. John D. Hawke Jr., Hon. Laurence H.
Meyer, and Hon. Ellen Seidman.
U.S. House. 2001. Subcommittee on Financial Institutions and Consumer Credit of the
Committee on Banking and Financial Services. Viewpoints of the FDIC and Select
Industry Experts on Deposit Insurance Reform: Hearing. 107th Cong., 1st sess., October
17.
Witnesses include Richard S. Carnell, Nolan L. North, Hon. Donald E. Powell, and
Kenneth H. Thomas.
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
24 FEDERAL DEPOSIT INSURANCE CORPORATION
Wilcox, James A. 2001. MIMIC: A Proposal for Deposit Insurance Reform. Journal of
Financial Regulation and Compliance 9, no. 4:338–49.
In this article the author proposes a mutual insurance model with incentive compatibility
(MIMIC). The MIMIC model is an alternative model for deposit insurance that emulates
the incentives and procedures of a mutual insurance organization in order to better align
the incentives of banks and the FDIC with those of the government and taxpayers. The
main characteristics of the MIMIC model are annual, fully risk-based premiums;
payments by the FDIC to the Department of the Treasury for its line of credit and
catastrophe insurance; rebates to banks when the reserve ratio exceeds a risk-based
ceiling; surcharges for banks when the reserve ratiOFalls below a risk-based floor;
dilution fees on deposit growth to maintain the reserve ratio; and refunds to maintain the
reserve ratio when deposits shrink. Adopting the features of the MIMIC model would
result in the deposit insurance system’s embracing the policies and practices of a private
sector mutual insurance organization.
LE G A L A SP E C T S OF DEPOSIT INSURANCE
DIVISION OF INSURANCE AND RESEARCH 25
12. Legal Aspects of Deposit Insurance
This section includes entries of a more legal nature, including but not limited to works 
dealing
with national depositor preference, liability issues in bank-failure cases, case studies 
from
bank-failure resolutions, and legislative histories.
NO ENTRIES
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
26 FEDERAL DEPOSIT INSURANCE CORPORATION
13. Too Big tOFail
Entries in this section deal specifically with the implicit bank regulatory policy known 
as "too
big tOFail" (TBTF): its origins; its economic consequences; its effects on bank 
behavior and
risk taking, on banks’ cost of funds, and on depositor behavior; and corrective policy
prescriptions.
Bastidon, Cecile, and Philippe Gilles. 2001. Prêteur en dernier ressort et statut de "too big 
to
fail" d'un emprunteur souverain: Le "jeu de faux-semblants" appliqué à la crise finançière
russe. (When the International Lender of Last Resort Faces a "Too Big tOFail" Sovereign
Borrower: The Russian Financial Crisis. With English summary.) Economie Appliquée
54, no. 2:129–51.
This paper aims to analyze the moral hazard relationship between Russia and the IMF.
The model used, which is original, is one with a multilateral lender, whose utility
depends on the stability of the International Financial System (IFS), and a borrowing
country, whose debt threatens this stability. For this reason, lending can be optimal for
the IMF, knowing that the loans will not be repaid. (ÆÉ 2001 EconLit)
Kane, Edward J. 2001. Dynamic Inconsistency of Capital Forbearance: Long-Run vs. 
Short-
Run Effects of Too-Big-to-Fail Policymaking. Pacific-Basin Finance Journal 9, no.
4:281–99.
This paper begins by reviewing the costs and benefits that fully informed creditors would
consider in deciding whether to recapitalize or liquidate an insolvent corporation. It goes
on to identify the additional concerns and conflicts of interest that incompletely informed
taxpayers face when short-horizoned government regulators manage the insolvency of
giant banks. Regulatory decisions may exhibit dynamic inconsistency because
opportunistic forbearance offers personal and bureaucratic rewards and officials who
confront bank insolvency in a timely way are threatened with substantial reputational and
career penalties. However, the model also indicates that dynamically inconsistent capital
forbearance could emerge because current taxpayers believe they can shift the costs of
resolving bank insolvencies tOFuture taxpayers. (ÆÉ 2001 EconLit)
Penas, Maria Fabiana. 2001. Bank Mergers and Too-Big-to-Fail Policy. Ph.D. diss., 
University
of Maryland.
It is believed that most governments follow an implicit too-big-to-fail policy of protecting
unsecured creditors of large insolvent banks in order to prevent a failure that could trigger
a contagious crisis throughout the financial system. This dissertation introduces a model
that analyzes a bank’s risk and funding decisions within a framework that includes both
deposit insurance and a bailout policy. Contrary to conventional wisdom, the model
predicts that it is possible for risk to decrease after an increase in the probability of a
bailout, and vice versa. The dissertation also provides empirical evidence that an
important motivation for bank mergers is to become too big tOFail. For example,
merging banks’ bond-adjusted returns were found to be positive and significant in pre-
TOO BIG TO FAIL
DIVISION OF INSURANCE AND RESEARCH 27
merger and announcement months, and the acquiring banks’ credit spreads on new debt
issues were lower after the merger. Also, cross-sectional regression results (after the
effects of diversification, changes in leverage, and asset quality are controlled for) show
that the increase in size resulting from the merger is a significant determinant of the
positive bond returns and the decline in credit spreads. However, these results are
significant only for medium-sized banks, which are the group most likely to attain toobig-
to-fail status after a merger.
Wolgast, Michael. 2001. “Too Big tOFail”: Effects on Competition and Implications for
Banking Supervision. Journal of Financial Regulation and Compliance 9, no. 4:361–72.
Since the 1980s, there have been increasing discussions about the potential consequences
of government intervention to prevent a large bank from failing. One basic concern is
that large banks may be receiving a competitive funding advantage from the public’s
belief that, were problems to arise, a large bank would not be allowed tOFail. This
concern has been echoed by Germany’s public sector banks, which claim that, because of
TBTF, major (private sector) banks—against which they compete—enjoy “implicit
guarantees” similar to their own “explicit” state guarantees. In this article, the author
argues that under realistic assumptions, especially with respect to incentives for bank
management and shareholders, TBTF does not lead to excessive risk taking by large
banks. Nor, he contends, does the advantage bestowed by TBTF surpass or even
approach the financing advantages enjoyed by public sector banks in Germany. The
author suggests, however, that with banking becoming increasingly global, TBTF does
have substantial implications for international banking supervisory arrangements and
suggests that one possible counter to cross-border systemic risk would be a lender of last
resort serving the entire European Union.
DEPOSIT INSURANCE: AN ANNOTATED BIBLIOGRAPHY, ANNUAL UPDATE
28 FEDERAL DEPOSIT INSURANCE CORPORATION
14. FDIC-Administered Insurance Funds
Entries in this section relate specifically to the structure, status, and future condition of 
the
two bank insurance funds administered by the Federal Deposit Insurance Corporation.
Entries also discuss the merits of maintaining separate insurance funds for thrifts and
commercial banks, and the effects of the industry’s continuing consolidation on the 
exposures
of the insurance funds.
NO ENTRIES