A second aspect addressed by this study is whether the effect of deposit insurance on bank stability depends on the quality of the regulatory and legal environment. This is a natural question to ask, since one of the tasks of bank regulation is to curb the adverse incentives created by deposit insurance, and a good legal system and an efficient judiciary can reduce default risk and curb fraud. Using various indexes of the quality of institutions and of the legal environment, we test whether in countries with better institutions deposit insurance has a smaller adverse impact on bank stability. In the third part of the paper we.
