Study On Deposit Insurance System

The Deposit Insurance System(DIS) is a system that after the qualified deposit financial institutions pay insurance premium to the special Deposit Insurance Corporation(DIC) according to a fixed proportion, DIG must offer the liquidity aids to the financial institutions or take the place of the failure institutions to pay the depositors back within a fixed limit when the payment crises occur or they fail. The core of the DIS lies in offering financial system a security network, which prevents the bank panic and financial crisis that happen when depositors aren't confident with other financial institutions because of the failure of exceptional ones leading to a run on a bank. The DIS results from the credit economy that reaches a special stage. Some bases of profound theory can be provided for the emergence of DIS. The internal weakness of banking management and the high society cost resulting from bank crisis are both internal factors bringing about the DIS. In fact the earliest modern DIG was founded for safeguarding the bank system. During the economic depression in the 30's of 20th century, many American bank went bankrupt. In order to be sure that the deposits would not be affected by the failure banks, the Bank Act was passed in America in 1933, which provided that the Federal Deposit Insurance Corporation(FDIC) and the Federal Savings and Loans Insurance Corporation(FSLIC) must be founded. Thus a new epoch was ushered in the history of the modern DIS. Teens of years later not only developed countries, but also developing countries imitated America one after another and set up their own DISs(the explicit DISs had already been founded in 68 countries and regions by the last century). Although DISs in many countries take FDIC as the original version, and their basic objectives are the same on the whole, which are safeguarding the depositors' interests, especially the most depositors' interests who have less deposits, setting up a reasonable procedure with which the banks having serious problems and being closed to fail can be disposed of, strengthening the public's confidence with banks and keeping the bank system stable, there are many differences among them because of the different national conditions. For example, there is a difference between public operation and private operation and a difference between compulsive insurance and voluntary insurance. In the respect of fund-raising method, premium rate and highest amount insured, there are some differences too. The way the countries dispose of these problems is not the same that whether to put the foreign currency deposits, inter-bank loans, the deposits in the branch of foreign banks and the deposits in the branch abroad of our banks into the range of subject-mater insurance. The diversity provides valuablereference for DIS that will be set up in our country, from which we can gain a good deal of enlightenment, including that insurance fund should be abundant, the amount insured should be as low as possible, DIG shouldn't be interfered by the government and premium received should fully embody the degree of risk.Although DIS has been a great success in the nearly 70 years long history of development, some problems shouldn't be ignored that emerge when DIS is operated, among which moral hazard and adverse selection resulting from DIS are always regarded as the most serious defect. These are all the forms of expression of moral hazard that depositors weaken the selection and supervision to the banks, banks insured prefer to taking up the high risk activities and the regulation agency connives at banks to bear the excessive risk. Adverse selection shows that "the inferior banks expel the excellent banks", which means that the financial institutions with high risk buy insurance positively, but the safe and steady ones are reluctant to insure in order to cut down the cost. The behaviors with moral hazard and adverse selection hinder the optimum recourse allocation and leads to the losses of social welfare. Some positive and effective measur...