The paper surveys the characteristics of explicit systems of deposit insurance in 68 countries. It compares these actual practices with a set of best practices that has been adopted by IMF staff for their advice to member countries. These best practices seek to establish a system of deposit insurance that provides incentives for all parties—whether they are directly or indirectly affected by the guarantee—to keep the financial system sound. The paper discerns some convergence toward best practices in recent years, but notes several areas where improvements in the incentive structure are still necessary.
not “incentive-compatible” for all of the parties that are directly or even indirectly affected by the DIScontract; that is, it fails to provide incentives that induce all economic agents affected by the DIS to keep the financial system sound. While it is possible for an incentive-incompatible system to perform its responsibilities and remain solvent, it will need to rely more heavily on a formal system of regulation and supervision than it would in a DIS that embodies a good incentive structure. Moreover, an ill-conceived DIS impedes necessary regulation and