Financial liberalization, deposit insurance and bank stability

This article investigates the impact of implementing an explicit deposit insurance scheme on the likelihood of banking crisis in countries with well-liberalized financial systems. We estimate the probability of a systemic banking crisis using a multivariate logit model in which alternative variables capturing the nature of the deposit protection arrangement enter as explanatory variables along with a set of control variables. We conclude that deposit insurance will be successful in alleviating moral hazard and increase the stability of the financial system only if a sufficient degree of financial liberalization exists.