Deposit Safety Nets
Deposit insurance in the U.S. was instituted in 1934 to restore depositor trust into the financial markets following the devastation of the Great Depression. It worked quite well for many decades in terms of preventing a major bank run and systemic risk.
In the last couple of decades there has been increased criticism about its benefits. Concerning market discipline, one can easily say that mispriced deposit insurance distorts the incentives of depositors to monitor bank risk taking activities. For example, 100% of deposits are under government guarantee (up to $100,000) in the U.S. compared to only 70% in England. Obviously, the depositors in England, knowing that they will lose money when the bank they are investing in fails, will be more cautious than U.S. depositors and will monitor bank activities with vigilance.
The question that challenges policymakers is really what an optimal deposit insurance scheme might be. Moreover "How to design and implement it?"
Read more about this topic: Market Discipline
Famous quotes containing the words deposit, safety and/or nets:
“A real life, a life that leaves a deposit in the shape of something alive.... It’s difficult to say what makes a life a real life.... You could also say it depends on a person being identical with himself.”
—Max Frisch (1911–1991)
“[As teenager], the trauma of near-misses and almost- consequences usually brings us to our senses. We finally come down someplace between our parents’ safety advice, which underestimates our ability, and our own unreasonable disregard for safety, which is our childlike wish for invulnerability. Our definition of acceptable risk becomes a product of our own experience.”
—Roger Gould (20th century)
“The philosopher caught in the nets of language.”
—Friedrich Nietzsche (1844–1900)