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Deposit Insurance Financial
存款保险金融
存款保险制度在促进经济金融的稳定中发挥了非常重要的作用。在全球范围内大多数发展中国家有存款担保制度。它是政府干预出面担任安全卫士，防止银行倒闭的一种形式。本系统还有助于在降低银行系统崩溃概率。安全网的安排，让消费者对自己的钱存入银行有信心，从而降低了银行挤兑。另一方面，存款保险制度不是设计用来导致银行危机，它会激励银行承担过度风险。
银行挤兑是金融危机的类型，它发生在在大量存款和他们的钱被收回同时担心该银行可能破产的时候。此操作将导致严重的流动性问题，从而导致银行倒闭。金融行业在不同国家之间有它的相互连结的根，一个机构的失败可能会导致另一个的失败，并可能威胁到金融稳定。
Deposit insurance plays a very important role in contributing to financial stability of the economy. Most developed countries around the globe have deposit guarantee system. It is a form of government intervention to safe guards the depositors during the bank failure. This system also contributes in reducing the systemic banking breakdowns. The safety net arrangement creates confidence to consumers on their money deposited with the banks thereby reducing the bank runs. On the other side when the deposit insurance system is not designed properly can give rise to bank crisis as it gives incentive to the banks to take excessive risks.
Bank run is type of financial crisis, it occurs when large number of depositors withdraw their money at the same time fearing the bank might become insolvent. This action will cause serious liquidity problem which leads to failure of Bank. The financial industries have its roots across different countries a failure of one institution may lead to the failure of another and can threaten the financial stability.
United Kingdom observed a major bank run after a century during the Northern Rock crisis in September 2007. Northern Rock was a Fifth largest mortgage lending bank in UK, relied heavily on the wholesale market for its funds, a world wide liquidity squeeze caused funding problem to the bank. Further, run on bank caused a serious liquidity problem to the solvent bank. From 14th to 17th September 2007 long queues of depositors were found outside the branches of Northern Rock. In theory with depositors being protected such a bank run should not have occurred.
The depositors in United Kingdom are protected by Financial Services Compensation Scheme (FSCS). It is an independent body it has been offering protection to depositors since 2001, it covers all the firms authorised by Financial Service Authority. The run on the bank was a test to the insurance arrangement in United Kingdom. I use the experience of Northern Rock crisis to study on the deposit insurance system in UK.
I show how the bank run occurred with the liquidity insurance model of Diamond and Dybvig (1983). According to this model bank run occurs due to self fulfilling behaviour of the depositors. I relate the run on the Northern Rock bank to this model, I extended the model by showing that information on the bank is initial cause of the bank run. In other words the run on Northern rock bank was not only speculative but it also had a fundamental origin. I analysed the effectiveness of deposit insurance, which according to the model is very effective solution in preventing the bank runs.
FSCS until September 2007 used co-insurance system to protect depositors. Co-insurance system do not provide 100% protection to the depositors, it involves the depositors to take part in the risk of loss. This system is employed to reduce the moral hazards. In other words this system gives incentive for the depositors to monitor on the banks activity. I study the role played by deposit insurance system during Northern Rock crisis. The system failed to protect the majority of depositors and it also did not play its role in preventing the bank run. Professor Willem Buiter commented on the deposit insurance arrangement in the UK during the crisis as a shambles (House of Commons, fifth report of session 2007-2008). My study show the co-insurance system will be very risky at the time of bank crisis. I have argued against the co insurance model with the experience of Northern rock crisis, this system did not work effectively because it was very difficult for the consumers to understand the concept. Furthermore expecting the consumers to judge the funding risks of the banks is unrealistic.
The Northern Rock crisis shows that the consumer understanding and the awareness about the deposit insurance system play an important role in preventing the bank run. As there are many recent designs and new measures to prevent bank runs and reduce moral hazards, we show they must account for a fundamental aspect, as a complex insurance system will be very difficult for the public to understand and will fail to create confidence. I discuss a correct level of compensation limit that UK must have to protect majority of depositors in UK with a statistical data and gross domestic per capita income of the country. I analyse the corrective measures in the insurance arrangement for UK, aimed at improving the financial stability.
It is a tight rope act. On one hand it can reduce the indices of bank run or even stop it all together. On the other hand, when not done carefully it can fuel crises (Patricia A. McCoy). I will give out the rationales for the deposit insurance system and also discuss the moral hazards it creates. Many economists have admitted that the deposit insurance system will give rise to moral hazards if the system is not designed properly. Policy makers choose either explicit or implicit form of protection. Explicit deposit insurance scheme is a formal system, it clearly specifies the amount of compensation to each depositor. UK and most of the other European countries have a explicit guarantee system. In implicit guarantee system the government protects depositors by paying the compensation directly to the depositors. The government decides the compensation limit.
RATIONAL FOR DEPOSIT INSURANCE
The deposit insurance system has direct and indirect rationale. The direct rationale is to protect the depositors against the risk of bank failure. The depositors are the consumers of the financial institutions, so it is necessary to protect them from loss. The indirect rationale is deposit insurance system discourages the bank runs, as the safety net arrangement provides confidence to depositors on their money, there will be only few reasons for the depositor to run on the bank. A bank run can turn a solvent bank in to insolvent bank, it can also run across the borders and cause financial instability. Bank runs at one place can causes the depositors at other banks to panic and go for early withdrawal. Various economic studies show a well designed insurance arrangement can stop the run on the bank and it will reduce the systemic crisis. In absence of this system even false information on a bank will create a bank run. At the time of bank failure government uses the insurance system as tool to stop the spread of failure by providing a full guarantee to the depositors. This system will also help in increasing the savings accounts and encourages the economic development. The deposit insurance system at the time of bank panics will make the entrepreneurs and household to carry on their normal system of work with out any panics as their funds are secure, so this helps in smooth progress in the economy.
A well-designed deposit insurance system can be, at best, just one component of sound financial system. (Gillian G.H.Garacia, 2000)
MORAL HAZARDS OF DEPOSIT INSURNCE
We know the deposit insurance has been very successful in protecting the depositors and contributes to the financial stability. The deposit insurance on the other hand can undermine the market discipline of the economy. Banks with generous deposit insurance system will indulge in riskier activities, they profit by involving risky strategy and transfer the loss of risk to the insurer. This practice will affect the market discipline and financial stability of the country. Secondly deposit insurance system do not give incentive to the consumers and the shareholders to monitor their banks activity, when banks take excessive consumers will not discipline their banks by withdrawing their deposits. When the insurance system is limited banks will be cautious in their activity because the chance depositors monitor the bank is high and will demand more return on their deposits.
The moral hazard of explicit deposit insurance in the recent times has been quite high. When a coverage limit of the deposit is higher the market discipline is significantly reduced (V.P. Ioannidou and Jan de Dreu 2006). Empirical Studies show the explicit deposit insurance has given incentive to moral hazard. The deposit insurance system can equally contribute to financial stability and also destabilize the system. However designing the system effectively will reduce the moral hazards. Many countries do not provide full guarantee to their depositors, the large depositors are left unprotected. This is because they are expected to watch the bank closely and withdraw their money if the bank involved in excessive risk. Insurance scheme, design features and incentive compatible techniques are the key to overcome the moral hazard problems. The coverage limit of the insurance system must be designed effectively to maintain long run financial stability. |
