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.
correctly. That is, after the banking system has been recapitalized and the system of supervision and regulation have been modernized adequately. This process can be expected to take time for the commercial banking system and even longer for institutions of lesser economic importance, such as rural cooperatives.
It may be that for banks funded mainly by small deposits, the speed of a depositor’s access to funds when his bank fails will determine credibility of the partial DIS. The bank’s unguaranteedcreditrating will indicate whether the bank will lose inter