Deposit insurance schemes must be credible – Bank of Portugal paper
Cypriot and Portuguese insurance schemes failed to stop bank runs due to low credibility, researchers say
A working paper published by the Bank of Portugal tests the hypothesis that “the success of deposit insurance arrangements at eliminating bank runs is likely closely tied to their credibility”.
In The importance of deposit insurance credibility, Diana Bonfim and João Santos investigate two cases where deposit insurance schemes had to handle bank failures.
During Portugal’s sovereign debt crisis, they say, foreign banks with subsidiaries in the country converted them into branches. This gave
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