A Law And Economic Approach To The Establishment Of Deposit Insurance In China

In the new era of credit economy, financial stability has became a global project of vital importance, and undoubtedly the commercial banking business is playing an indispensible part in it. Together with the central bank and other regulators, the deposit insurance agency is taking more and more responsibilities to promote the financial development and maintain its stability, for this reason, China has decided to establish its deposit insurance scheme (DIS). However, under the existing financial environment and the legal system condition, is it necessary to build the DIS? If so, what kind of DIS dose China need? This paper tries to give responses to these two questions.This paper includes 5 chapters: first of all, the Chapter 1 explains what the DIS is, and then makes a distinction between the"Explicit"DIS and the"Implicit"DIS. After that, it makes a brief summarization of the studies and researches on the DIS. As to the practice of DIS, it gives an abbreviated review of the DIS in the USA.The Chapter 2 analyses the necessity of applying the DIS in China. Through the analysis of the macro-economic data and the current financial situation, we found that both the extremely high saving ratio and the problem of"too big to fail"require the DIS. Besides, after using the"cost-benefit analysis"approach to compare the EDIS and the existing IDIS, the result tells us the EDIS is much effective and efficient. In addition, it should be set up in a relatively steady financial environment, but not now.The Chapter 3 studies the coverage of DIS. After the comparison of the results of the empirical researches across the world, we found a reasonable coverage and the co-insurance could reinforce the private supervision, besides a dynamic adjusting model would be more effective.The chapter 4 discusses whether the undifferentiated premium or the risk-adjusted premium is more efficient. Through the analyses of the reaction of the member banks, the result shows the risk-adjusted premium could control the impact of"Moral Hazard"and"Adverse Selection"effectively. In the short run, the rating based approach is more realistic; nevertheless, in the long run, it's wise to design a more precise quantitative model.The chapter 5 quests which mode of DIC would be more helpful in keeping the financial stability, obviously, both the failure of the DICJ and the success of the FDIC tell us it's of fundamental importance to authorize the deposit insurance agency to regulate the commercial banks independently.The last part sums up the main conclusion of the paper, China needs an EDIS with a limited coverage, risk-based premium, and in the right time. Besides, we should keep its agency independently.