Deposit Insurance And China's Choices

With the reform of financial system, the establishment of explicit deposit insurance has been the focus of the society. In reality, the existing implicit deposit insurance will no longer adapt to the situation of our country, and in the last decades, the establishment of explicit deposit insurance has been one of the most important trends of bank system reform and development in the world.However, there are extensive controversies among scholars over the necessity of the transition from implicit deposit insurance to explicit deposit insurance. The tasks of this paper are to discuss the necessity of the establishment of explicit deposit insurance and to provide some policy suggestions on how to establish explicit deposit insurance.We discuss the necessity of the establishment of explicit deposit insurance from the following two angles. From the practical angle, with the deepening of market-oriented reform, banks are to confront the hard budget constraints of bankruptcy, and it is necessary to establish explicit deposit insurance in order to facilitate the reform of bank system. In the same time, the establishment of explicit deposit insurance is needed to satisfy the international convention and the demand of social development and so on.From the angle of the impact of explicit deposit insurance on the behavior of bank, we build a model that maximizes the equity of stockholder under the constraints of market and cost. Using this model, we analysis the differences of banks under implicit deposit insurance and explicit deposit insurance. We conclude that the supervision level of bank increases and the incentive of moral hazard of bank decreases with the institutional transition. Therefore, it is necessary to establish explicit deposit insurance in order to decrease moral hazard.We also provide some suggestions on how to build explicit deposit insurance based on the international practices of deposit insurance.