Economic rehabilitation programme and the existence of implicit deposit insurance in North Cyprus

Purpose – The purpose of this paper is to investigate the role of implicit deposit insurance in North Cyprus Banking Sector during the period 1984‐2002. Design/methodology/approach – A multivariate logit model is an empirical methodology that identifies the probability of bank failure. The model links the probability of banking problems to a set of bank‐specific factors, macro‐environment and structural weaknesses that may have exacerbated the internal troubles of the financial institutions. Findings – The empirical findings suggest that in addition to the microeconomic variables, high credit expansion to private sector, implicit deposit insurance, existence of economic rehabilitation programmed, financial liberalization, weak regulation and supervision played an important role in the escalation of the 2000‐2002 banking distress in North Cyprus. Research limitations/implications – For further research, this paper may extend the time period and include other macroeconomic variables such as inflation, exchange pressure that may have a direct effect on bank failure in North Cyprus. Practical implications – This paper presents a practical application of the deposit insurance policy as a main determinant of bank failure, which would help bank examiners, investors and regulators in their decisions to alert management in time, to prevent bank failure. The ability for early detection of any structural or financial weaknesses in the country will help to minimize financial costs of the island that brought about by financial instability. Originality/value – Overall, the empirical results that are obtained by logit model analysis are quite robust. The logit regression results reveal that the predicted values, i.e. the potential risk levels for Mediterranean Bank was very high in this analysis. Towards 2005 Mediterranean Bank had to close, which prove that the model is robust.