Banking stability and optimal deposit insurance design

This thesis focuses on deposit insurance schemes and their relationship to banking crisis. The empirical model used covers 55 developed and developing countries over the period 1970-1989. This study finds that banking crises are closely linked to adverse macroeconomics shocks like economic recessions, financial liberalization, capital account liberalization and short term capital flows, and currency depreciation. External vulnerability (expressed as the ratio of M2 to foreign reserve) is also found to be a key variable. The empirical results also show that deposit insurance increases the probability of banking crises, due to induced moral hazard and adverse selection