EFFECTIVE DEPOSIT INSURANCE SYSTEM FOR SMALL COUNTRY WITH CONCENTRATED BANKING SYSTEM – WITH SPECIAL EMPHASIS ON DEPOSIT INSURANCE FUND OF THE REPUBLIC OF NORTH MACEDONIA

Abstract

It is accepted throughout the world that well designed deposit insurance is an important element in a national safety net for maintaining and extending the stability of the financial system. A key function of deposit insurance is to provide a credible safety net for depositors, which is beyond doubt, including in times of crisis. Still, the design and structure of a deposit insurance scheme (DIS) depends from numerous institutional, procedural and instrumental questions. The designs of DIS of course  is important because every insurance scheme produces certain level of moral hazard and affect private market discipline, banking stability, financial development, and the effectiveness of crisis resolution. There are few characteristics of Macedonian banking system that must be taking in to account in order to determine optimal DIS for Republic of Macedonia: concentration of the banking system, ownership of Macedonian banks, supervisory regime and the nationality of depositors. This paper will analyze the best practices for DIS regarding their funding, the coverage ratio and their architecture. Our DIS is ex ante funded but doesn’t take in to account the riskiness of its members. In addition, the size of DIS, because of the concentration in the banking system, cannot cover fall of large or some of the medium banks, so the main question is how effective it will be as part of our safety net in such a case. These questions will be addressed through the developments in DIS after the financial crisis from 2008.