that they cause the government to consider instituting a fullguarantee. The typical developing-crisis scenario is one in which insolvencies begin to be perceived by the markets. The crisis will become transparent when liquidity problems occur in individual banks, there is segmentation and eventual non-acceptance in the interbank market(s). customers (both depositors and creditors) withdraw significant amounts of their funds or refuse to renew their contracts, banks engage in distress bidding for deposits. 70 the market becomes aware of shortfalls under reserve
A well-designed deposit insurance system (DIS) will provide incentives for citizens to keep the financial system sound. However, a poorly designed DIS can foster a financial crisis. This paper, therefore, makes recommendations for creating and running a limited, incentive-compatible, DIS. The paper also examines factors in the decision to grant, temporarily, a comprehensive guarantee, and the design of that guarantee, should a systemic financial crisis nevertheless occur. It concludes with guidance on the removal of that guarantee.