Deposit insurance linked to short-term decline in financial depth in unstable banking sectors.
Deposit insurance can help stabilize banks, but it can also cause problems in weak regulatory environments. A study using data from the World Bank shows that in unstable banking sectors, having deposit insurance can actually lead to short-term decreases in financial depth. This means that just having deposit insurance may not solve the issues in the financial system. Policymakers should consider the timing and reasons for implementing deposit insurance, as it can have a big impact on economic growth.