Yesterday's How about International Microdeposit Insurance? drew an excellent flurry of commentary, which helped me appreciate the complexities of this idea. Bryan shared his ongoing thinking on branding and competition. Ben asked whether it would undermine local institutional development. Daniel Rozas voiced what I think is the most potent concern, which is that if the insurer lacks the power to liquidate failed banks, the premia could run to, say, 5--6%, which could be prohibitively high.There were also couple of sweeping statements that I did not see backed by evidence. Hans Dieter Seibel says the thing is impossible. Oscar says, "Liquidation powers [are] key to successful deposit insurance."I followed a lead from Oscar and found some theory and evidence on the prevalence and efficacy of deposit insurance. They don't seem to drive toward a particular verdict on the proposal for international microcredit insurance.The World Bank has a database built by James Barth, Gerard Caprio, and Ross Levine, with detailed country-by-country information on whether a deposit insurance system operates, and if so what powers the insurer has, among other details. By my count, 75 countries had explicit deposit insurance in 2007; strikingly, barely a dozen of these gave the insurer the authority to decide whether to intervene in a bank's operations. (See rows 8.1 and 8.1.10 of the spreadsheet). Seemingly, a lot of legislators and regulators don't think liquidation power is essential---including in Belgium, the Netherlands, Chile, and the Czech Republic. Unclear to me is how much the schemes in developing countries reach microfinance institutions.The builders of this database also wrote Rethinking Bank Regulation: Till Angels Govern, from which I learned:
- Deposit insurance has two main rationales: protecting small savers, and stabilizing the banking system (by preventing bank runs).
- Whether it succeeds on the second is theoretically unclear: yes, it prevents bank runs, but it may also encourage savers to behave lazily, happily placing their money in banks that lend irresponsibly...moral hazard, in other words.
- Aside from wielding the power to liquidate failed banks, deposit insurers can do several things to reduce moral hazard: basing premia on the riskiness of a bank's lending portfolio; capping amounts covered per account or per saver so that large savers still have an incentive to monitor the prudence of bank lending; and requiring the banks to co-insure so that their shareholders bear part of the risk. Caps also limit the cost of insruance---perhaps for microsavings, they could be set at twice GDP/capita or some such. It seems to me that insurers could also restrict how insured deposits are lent, for example, requiring that they be put only into government paper.
- As is their wont, the authors run lots of regressions on their database. They find that institution of deposit insurance significantly increases the chance of banking crises. I'm on record with my doubts about such cross-country regressions. Every such regression I have examined closely has turned to sand. At any rate their findings corroborate an earlier paper by Asli Demirgüç-Kunt and Enrica Detragiache.
- Barth, Caprio, and Levine also check whether the power to liquidate affects banking stability, and don't find that it does---again, take it for whatever it's worth (page 221)
What I haven't found yet is a historically, rather than statistically, based analysis of impacts of deposit insurance. I could imagine, for example, a thoughtful scholar of banking in the United States concluding that the deposit insurance system of 1933 has made our banks more unstable, perhaps contributing to the savings & loan crisis in the 1980s. And I can imagine a scholar concluding the opposite. Maybe you know where I can find such an analysis.So it seems to me that the idea ain't dead yet. But then, it's only been 33 hours.
