The Influence of Deposits Insurance on the Stability of the Baltic States Banking system/Indeliu Draudimo Itaka Baltijos Saliu Banku Sistemos Stabilumui

By Lakstutiene, Ausrine; Krusinskas, Rytis et al. | Journal of Business Economics and Management, September 2011 | Go to article overview

The Influence of Deposits Insurance on the Stability of the Baltic States Banking system/Indeliu Draudimo Itaka Baltijos Saliu Banku Sistemos Stabilumui


Lakstutiene, Ausrine, Krusinskas, Rytis, Rumsaite, Dalia, Journal of Business Economics and Management


1. Introduction

During the recent decades the economic and financial systems of the whole world became very dependent on one another. The processes in the financial markets affected both the national economies of countries and the behaviour of individual investors and savers by creating new types of risks for market actors. Due to these reasons the world financial markets and changes in them manifested through globalization processes and influencing the stability of the financial system of a country have become the object of scientific research during the last decade. The importance of financial crises and their influence on the economies of the countries, stability of the financial sector, highlighting the role of banks, is proved by scientific research not only in the world (Drehmann 2002; Hoque 2009; Laeven, Valencia 2008; Ingves, Lind 1996; Ucal et al. 2010; Dahl-heim, Nedersjo 1993; Viotti 2000, Maysami, Lim 2004; Sabourin 2007; Kopcke 2000), but also in Lithuania (Strumickas, Valanciene 2006; Macerinskiene, Ivaskeviciute 2008; Martinaityte 2008; Leika 2008; Lakstutiene, 2008, Lakstutiene et al. 2006, 2009; Boguslauskas, Mileris 2009; Zukauskas, Neverauskas 2008). Such research does not speak about the financial security net which is necessary to reduce the risk of financial crises. Santomero (1997); Aktan, Masood (2010), Bernat (2009); Ince, Aktan (2009); Gine-vicius, Podvezko (2008); Arslan, Karan (2009); Aluko (2007) states in his works that a financial system would not exist without financial institutions, which play the critical role in the economy: they not only support the expenditure of the private sector, but manage to finance part of the government's expenditure, and at the same time serve as an accumulator of savings providing the country with financial resources. However, the financial institutions may create instability in the financial sector and the main reason for instability is the fact that the worth created by the financial institutions is financed by obligations, i.e. funds of depositors. Due to this reason, which is named by the majority of scientists (Bernat 2009; Demirguc-Kunt, Kane 2002; Frolov 2004; Demirguc-Kunt et al. 2005; Hoque 2007; Schich 2008), almost all governments of the world created a security net for the financial system, which would ensure stability and integrity of the financial system. The proper financial security net is necessary to reduce the risks during major financial crises. Without the proper financial security net any rumor about solvency or liquidity of a financial institution may have a possibility to justify itself and become an absolutely exaggerated financial crisis (Schich 2008). Demirguc-Kunt et al. (2005) distinguish the following possible components of the security net: (1) explicitly defined or undefined deposit insurance, (2) regulation and supervision of bank activities, (3) the function of the central bank as the last creditor and (4) creation of procedures for bank bankruptcy decision. Upon analyzing the components of the security net, other authors (Santomero 1997; Titarenko 2002; Hoque 2007; Schich 2008) narrow them down slightly, distinguishing only three main components of this net: (1) bank supervision system, (2) the function of the last creditor and (3) deposit insurance. Schich (2008) suggests a slightly wider concept of the financial security net, indicating that by adding the function of mechanism of management of failures to the functions above it becomes possible to extend the scope of discussed problems. Scientists (Santomero 1997; Demirguc-Kunt et al. 2005; Schich 2008), analyzing the financial security net, maintain that the elements of the financial security net cannot exist separately: the individual components of the financial security net are strongly interrelated. The foundation of any regulation structure is directed towards ensuring financial stability, thus enabling the appearance of the element of insurance of a certain type of deposits, which is one of the important indicators of the stability of the banking sector. …

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