Safety Net Design and Systemic Risk: New Empirical Evidence

Recent econometric evidence has noticeably changed views on the
desirability and the appropriate design of explicit Deposit
Insurance Schemes (DIS). The purpose of this paper is to take a
second look at the data. After surveying recent empirical work and
providing a theoretical framework, we argue that existing studies
may suffer from a selection bias. Building on a new database on
explicit deposit insurance compiled by the author, we perform a
variety of semi-parametric and parametric tests to see whether and
how explicit deposit insurance (de)stabilizes banking systems. We
find that the evidence indeed suggests that a selection bias is
present. Controlling for this bias leads to a reassessment of
recent studies. In particular, making deposit insurance explicit
has a rather moderate and, if any, stabilizing effect on the
probability of experiencing a systemic crisis.