Economic Review, Vol. 55 No. 3-4, 2004.
Review article
WHAT SHOULD BE APPROPRIATE COVERAGE LEVEL OF DEPOSITS IN CROATIA?
Michael Faulend
Abstract
In the process of formulating a deposit insurance scheme, one of the key issues is to determine the level of coverage. Correctly determined coverage would help to fulfill the aims of the deposit insurance scheme itself and to minimise the moral hazard problem, a
negative externality which inevitably coexists with any deposit insurance scheme. In this regard, an important question is how appropriate is the existing coverage level in Croatia
(100.000 kuna). Also, one can ask whether an increase to 20.000 € (or approximately to 150.000 kuna), when entering the EU, would cause any problems. To answer these questions, this paper tries to establish the most appropriate coverage level for Croatia. There are
two approaches used in the paper. The econometric one analyses data for a large sample of countries with deposit insurance schemes. Independently, the second approach analyses the structure of deposits at banks in Croatia. Both approaches lead to virtually the same results. On this basis, it can be concluded that current coverage in Croatia (100.000 kuna) is not significantly higher than the most appropriate (optimal). However, an increase in coverage
to 150.000 kuna could potentially harm the deposit insurance scheme and consequently decrease the stability of the Croatian banking system in the mid-term.
Keywords
deposit insurance; coverage; banking system
Hrčak ID:
16290
URI
Publication date:
15.4.2004.
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