Deposit Insurance for Economies in Transition
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Description
Economies in transition present unique problems for institutions designed to prevent banking crises. On the one hand, transitional economies are vulnerable economies. They are prone to financial system problems that, if not handled properly, can spread general havoc. The vulnerability of transitional economies suggests that there may be a special need for programmes designed to prevent banking instability. Thus, it might appear that deposit insurance, a programme specifically intended to prevent runs and panics, is desirable and necessary for transitional economies. On the other hand, transitional economies are prone, not only to banking crises, but also to inflation and poor fiscal discipline. This macro-economic vulnerability suggests that deposit insurance can be positively dangerous for a transitional economy. The guarantee of deposits is often a guarantee of losses, especially when newly privatized banks hold carry-over portfolios of bad loans and lack expertise in private banking. Government losses must be paid for, and the most feasible way of paying for such losses is through inflationary policies such as central bank lending. Deposit insurance may mitigate the dangers of a banking crisis, but only at the cost of macro-economic instability. The case for government-sponsored deposit insurance in transitional economies is thus an uneasy one. In this chapter, some of the pros and cons of deposit insurance for these economies will be explored, and several alternatives that may avoid some of the problems of existing programmes, albeit with costs and dangers of their own, are suggested.
Source Publication
Bank Failures and Bank Insolvency Law in Economies in Transition
Source Editors/Authors
Rosa M. Lastra, Henry N. Schiffman
Publication Date
1999
Recommended Citation
Miller, Geoffrey P., "Deposit Insurance for Economies in Transition" (1999). Faculty Chapters. 2030.
https://gretchen.law.nyu.edu/fac-chapt/2030
