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Document Type

Case Study

Case Series

Account Guarantee Programs

JEL Codes

G01, G28

Abstract

On October 26, 2008, at the height of the Global Financial Crisis, the Central Bank of Kuwait (CBK) announced that it would support Gulf Bank, the country’s third-largest bank, which had sustained losses on clients’ derivatives trades. In the same announcement, it said it would ask the government to guarantee all banking deposits to shore up confidence in banks and to keep Kuwait’s banking system competitive with those of other countries, including neighboring Saudi Arabia and the United Arab Emirates, which had already announced unlimited deposit guarantees. The legislature passed an unlimited deposit guarantee bill eight days later. Kuwait did not have an existing deposit insurance system at the time, and legislators tasked the CBK with its implementation. The guarantee covered a variety of deposit accounts in Kuwait-based banks, including commercial banks, branches of foreign banks, banks whose operations were compliant with Islamic Sharia law, and specialized banks. The CBK did not charge fees for coverage, relying instead on public funds to cover any payouts. The policy guaranteed a total of 24 billion Kuwaiti dinars (KWD) in deposits in 2009 (USD 84 billion). As of March 2022, Kuwait’s National Assembly had not terminated the unlimited guarantee. There is no evidence to suggest that a payout event has occurred. The International Monetary Fund (IMF) has argued since 2010 that Kuwait should replace the unlimited guarantee with a permanent deposit insurance system with an appropriate insurance cap. The IMF has said that the unlimited policy may raise moral hazard concerns and reduce market discipline on banks. Even so, the IMF says that the guarantee has contributed to financial stability in the absence of a legal and constitutional environment that would allow for swift remedial action or resolution of ailing financial institutions.

Date Revised

2022-07-15

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