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Mr. George G. Kaufman and Mr. Steven A. Seelig

depositors in bank failures is likely to effect both the supply of and demand for government guarantees and to influence the resolution options available to a deposit insurer. The larger the potential losses in bank resolutions are perceived to be, the greater the demand for government guarantees by depositors and other stakeholders is likely to be and the more likely that governments will bow to such political pressures and supply the guarantees. Thus, the way depositors are treated at insolvent institutions in terms of the magnitude of the losses they may incur and their

Mr. Tito Cordella and Mr. Eduardo Levy Yeyati

affects risk-taking behavior but still induces negative feedback on the probability of bank failure by allowing deposit rates to adjust. Thus, the bank is “taxed” during hard times and “rewarded” during good times. While the bank may prefer a more even distribution of the burden, for example, by subsidizing depositors in good times to ensure lower funding cost in bad times, there is no way depositors can commit to not charging the bank a higher rate once risk goes up. In those cases, nondisclosure, by eliminating the state-dependent tax. improves the bank’s chances of

Mr. George G. Kaufman and Mr. Steven A. Seelig
Losses may accrue to depositors at insolvent banks both at and after the time of official resolution. Losses at resolution occur because of poor closure rules and regulatory forbearance. Losses after resolution occur if depositors' access to their claims is delayed or "frozen." While the sources and implications of losses at resolution have been analyzed previously, the sources and implications of losses after resolution have received little attention. This paper examines the causes of delayed depositors' access to their funds at resolved banks, describes how the FDIC provides immediate access, reports on a special survey of access practices in other countries, and analyzes the costs and benefits of delayed access in terms of both the effects on market discipline and depositor pressure to protect all deposits.
Mr. Eduardo Levy Yeyati and Mr. Tito Cordella

good times. While the bank may prefer a more even distribution of the burden, e.g. by subsidizing depositors in good times to ensure lower funding cost in bad times, there is no way depositors can commit to not charge the bank a higher rate once risk is up. In those cases, non disclosure, by eliminating the state-dependent tax, improves the bank’s chances of survival. The model provides some testable implications. In section III , we noted that informed depositors can influence the bank’s risk level when its charter value is high enough. Therefore, a negative

Mr. Eduardo Levy Yeyati and Mr. Tito Cordella
This paper examines how public disclosure of banks’ risk exposure affects banks’ risk-taking incentives and assesses how the presence of informed depositors influences the soundness of the banking system. It finds that, when banks have complete control over the volatility of their loan portfolios, public disclosure reduces the probability of banking crises. However, when banks do not control their risk exposure, the presence of informed depositors may increase the probability of bank failures.
International Monetary Fund

their lending activities. Many experts now believe, therefore, that an insurance or guarantee scheme that protects only a proportion of each individual’s deposits, say 50 percent, is preferable to full protection. In this way, depositors will more carefully monitor bank performance, and bank owners and managers will be forced to behave more prudently for fear of losing their depositors. (3) Interest rates Until recently, different interest rate regimes applied to the specialized banks and the CCBs. The former were not allowed to pay, on average, above 0

Mr. Saeed Al-Muharrami and Mr. Daniel C Hardy
Islamic and cooperative banks such as credit unions are broadly similar in that they both share some risk with savers. However, risk sharing goes along with ownership control in cooperatives, whilst Islamic banks share risk with borrowers and downside risk with depositors. Islamic banking is consistent with mutual ownership, which may ease some of the governance and efficiency concerns implied by Shari’ah constraints. Greater risk sharing among cooperative bank stakeholders, using mechanisms embedded in Islamic financial products, may strengthen cooperatives’ financial resilience.
Mr. Saeed Al-Muharrami and Mr. Daniel C Hardy

more practical and contingent. First, cooperative banks and credit unions could consider paying out a higher share of (or even all) returns in the form of dividends, and a lower share as predetermined interest on accounts. In this way, depositors bear more of the risk from year to year, and the credit union’s inflexible capital structure is less constraining and less of a source of vulnerability. Insofar as depositors are compensated more in the form of variable dividends, they can absorb some loss in bad periods without the need for a rights issue, and the

International Monetary Fund. Monetary and Capital Markets Department

undertake a special examination for the purpose of preparing for a payout. Comments b. The power to review in advance by itself (or by request from the supervisory authority) the way depositor records are kept by banks to ensure the reliability of records, to reduce the time needed for calculation and verification of depositors’ claims; Description PIDM has the power to conduct a special examination for this purpose. PIDM is also working with its MIs to develop and test a “single view” system to speed up processing of depositor accounts in the

International Monetary Fund. Monetary and Capital Markets Department
This paper evaluates and addresses Malaysia’s compliance with the Core Principles for Effective Deposit Insurance Systems (Core Principles), and reviews relevant laws, regulations and regulatory and supervisory practices related to conventional banking sector, and the operations of Perbadanan Insurans Deposit Malaysia (PIDM). Though several weaknesses in the legal framework have been noted in this assessment, there has been no experience with bank failures in Malaysia since PIDM’s establishment in 2005. The paper also covers Islamic deposits, which manage a separate Islamic Deposit Insurance Fund (IDIF).