Journal of Multinational Financial Management 10 2000 29 – 62
Domestic and international practice of deposit insurance: a survey
Wai Sing Lee
a,1
, Chuck C.Y. Kwok
b,
a
Department of Business Studies, The Hong Kong Polytechnic Uni6ersity, Hung Hom, Kowloon, Hong Kong
b
Darla Moore School of Business, Uni6ersity of South Carolina, Columbia, SC
29208
, USA Received 3 July 1998; accepted 11 January 1999
Abstract
The literature on deposit insurance tends to be mostly confined to a discussion of the reform proposals and risk-related premium assessment methodologies. The theoretical expla-
nation of the alternatives to the major components of a deposit insurance scheme is sketchy. Comparisons on the international practice of deposit insurance are not extensive and
comprehensive enough. To fill the gaps in the literature, this paper examines the theoretical foundations of the key issues of a deposit insurance scheme, provides a critical comparison
on the international practice of deposit insurance, and makes suggestions on how a complete deposit insurance scheme can be properly designed and implemented. © 2000 Elsevier
Science B.V. All rights reserved.
Keywords
:
Banking; Deposit insurance; Deposit protection JEL classification
:
G10; G21; G28 www.elsevier.comlocateeconbase
1. Introduction
The usual devices used by a country to prevent banking instability include bank regulation and supervision, the provision of last resort lending, and the establish-
ment of a deposit insurance DI or deposit protection scheme DPS
2
. These three
Corresponding author. Tel.: + 1-803-777-3606; fax: + 1-803-777-3609. E-mail addresses
:
bujohnpolyu.edu.hk W.S. Lee, ckwokdarla.badm.sc.edu C.C.Y. Kwok
1
Tel.: + 852-2766-7132; fax: + 852-2765-0611.
2
Deposit insurance is also known as ‘deposit guarantee’ or ‘deposit protection’. 1042-444X00 - see front matter © 2000 Elsevier Science B.V. All rights reserved.
PII: S 1 0 4 2 - 4 4 4 X 9 9 0 0 0 1 8 - 3
mechanisms are complementary to each other and are collectively known as the safety net in a banking system.
Although the concept of deposit insurance is quite simple, deposit insurance systems are relatively complex mechanisms. When designing a deposit insurance
system, one has to grapple with a sizable number of complicated issues, some of which are not easy to resolve. The special banking environment of the country
proposing to set up a DPS has to be taken into account at the design stage. Evidence from countries with deposit insurance shows that no DPS can be perfect.
Most of the existing literature on deposit insurance tends to be overly confined to a discussion of the reform proposals and risk-related premium assessment method-
ologies. The theoretical explanation of the alternatives to the major components of a deposit insurance scheme is sketchy. Comparisons on the international practice of
deposit insurance are not extensive and comprehensive enough. Furthermore, advice on the design of a complete deposit insurance scheme is literally absent. To
fill the gap in the literature, this paper examines the theoretical foundations of the key issues of a deposit insurance scheme, provides a critical comparison on the
international practice of deposit, and makes suggestions on how a complete deposit insurance scheme can be designed and implemented properly.
In this article, we will first state the unique role of deposit insurance. This is followed by a detailed discussion of each of the alternatives of the major features
of a DPS including administration, coverage, protection ceiling, financing, premium assessment and contingency measures. Reference will be made to international
practice wherever possible. A summary of recommendations regarding the design of a DPS will be given at the end.
2. Rationale for deposit insurance
