Deposit Insurance as Private Club: Is Germany a Model?

This paper describes and evaluates the deposit insurance scheme set up by private commercial banks in Germany in 1975. Unlike schemes in other countries, its funding and management is completely private, without any public supervision. While other schemes rely on monitoring by depositors to decrease moral hazard problems, the German scheme relies on peer monitoring by its member banks. This paper evaluates the German deposit insurance scheme on the background of its unique characteristics, a very concentrated private banking market, a strong institutional environment and an antibankruptcy bias in Germany, and determines to which extent it can serve as a model for other countries. *World Bank, [email protected], tel.: (202) 473-3215. I would like to thank Benno Wink and Karl-Heinz Hillen from the German Bundesbank, Joergen Bang from the German Bank Association, and Charles Calomiris, Gerard Caprio, Aslı Demirgüç-Kunt, Udo Franke, Ed Kane, Dirk Kiesewetter, Daniela Klingebiel, Luc Laeven, Winfried Liedtke, Geoffrey Miller, Haluk Unal and participants at the Deposit Insurance Conference at the World Bank for helpful comments, without implicating them. This paper’s findings, interpretations, and conclusions are entirely those of the author and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent.