The Feasibility Of China's Adoption Of An Obvious Deposit Insurance System

The deposit insurance system, an important constituent of a country's financial system, is one of the three recognized essential factors for financial safety. It plays a positive role in protecting the client's benefits and the maintenance of the stability of a financial system. The recessive deposit insurance system our country is adopting has some disadvantages for the stability of our financial industry. Therefore, to set up a deposit insurance system with Chinese characteristics is a strategic task to help deepen the financial reform and to enhance the monetary system.With discussions of relative research materials, this paper explores the feasibility of establishing an obvious deposit insurance system in China. It uses standard and empirical research methods. There are also comparative analyses. The whole paper is divided into the following chapters.The Introduction, as the first chapter, lays out the framework of the research design. It explains the research background, the choice of the subject, the significance the subject, the main research topics, the expected results, and also approaches and methods adopted.Chapter Two is the theoretical review. This paper employs two main theories: on e is the theory of consignor-agent relationship, the other the Prisoner's Dilemma of the Game Theory. The relationship between bank and client is one of consignor and agent. The client deposits money into the bank, hoping the bank will bring benefits for them. The clients can only judge from the observed information how well the banking is being operated. Whereas, the bank is usually unable to know where the clients' money really go in the actual world. This bi-directional information asymmetry provides a chance for the runs on banks. When the client has the good reasons to believe his bank becomes a risk, even if the runs on banks do not occur, the client knows he will have some financial lose. On the contrary if the runs on banks do occur, loses will possibly increase. It is true that if the client withdraws money, he won't get any lose at all. Therefore, regardless of the other parties' (including the bank and other clients) choice, the client's optimal strategy is money withdrawal. Even if all the clients could realize that it is more advantageous for everyone's interest if they don't run on bank, the clients' worries will still urge them to withdraw money from the bank. This is the so-called prison's dilemma. After the detailed analyses of the above two theories, this paper proposes that the deposit insurance system has prevented in a certain degree the runs on banks because of the bi-directional information asymmetry, and the individual client's rational choice and/or the clients' collective irrational conflicts with the bank. The deposit insurance system also prevents the tide of bankruptcy of financial companies, which may be caused by the poorly-operated financial companies' consequences on the well-operated ones. The obvious deposit insurance system also helps to maintain the stability of the financial system.Chapter Three introduces the origin, the definition and the categorization of the deposit insurances system. It also compares several such systems. The deposit insurance system is a debt settlement system in case of an accidental bankruptcy of a bank. It's meant to protect the interests of the client and to keep the stability of the financial industry. The deposit insurance system had two kinds: obvious and recessive. This paper fully discusses these two systems in terms of the acknowledged foundation trust bases, nature, rules and procedures, the degree of protection and other related aspects, thus to show the advantages of an obvious one over a recessive one.Chapter Four analyses the present situation of China's recessive deposit insurance system. It also points out its drawbacks, for example, it reduces the bank efficiency, increases the financial risk, attenuates the competition between banks. It also elicits the unfair competition with other financial products; it delays the multiple financial development. Meanwhile, it encourages moral risks. This chapter parallels discusses the advantages of obvious deposit insurance system, which are, through the protection of the clients, to prevent the infection of runs on banks, to maintain the financial stability. It will enhance the fair competition in the financial market, the construction of an effective market withdrawal mechanism, the opening-up of the financial industry.Chapter Five discusses what we can borrow from other countries' deposit insurance systems. By introducing three representative deposit insurance systems (their particular domestic situations, their designs) in USA, Japan, and Germany, this chapter proposes how China's deposit insurance system can be designed from the aspects of its structure, participants, methods, ranges, insurance quota, premium rate and suggestions for problematic banks.As the main body of this paper, Chapter Six discusses the feasibility of implement-ting an obvious deposit insurance system in China based on analyses of the theoretical supports, the present financial situation, the effects of possible adoption of obvious deposit insurance system, and the attitudes of the central bank. The intrinsic instability of the banking industry, the informational asymmetry between banks and clients, the runs-on banks and bankruptcy of the banks, and the constraints of measurement of central bank facing such problems, all show the necessity of the establishment of an ob- vious deposit insurance system. In fact, the central bank also is beginning to prepare to implement such a system. This indicates we have ready conditions to set up such a system. Of course, the effects of such a system guarantee its feasibility. This paper analyzes the effects of an obvious deposit insurance system to see whether it benefits financial development and stability, whether it destroys market discipline, and whether it will increase the moral risks. In this chapter, the author further proves its feasibility with a simple economic model. Meanwhile, the author also shows possible difficulties and pre-causations.Chapter Seven concludes this research and presents policy suggestions. Presently China has the internal and external conditions ready to adopt an obvious deposit insurance system, with the related legal amendments being made. The obvious deposit insurance system is a practical measurement and a new mechanism for the central bank to manipulate financial risks, to keep the stability of financial industry, and also to protect the benefits of clients of medium and small amount investments.This paper compares the advantages and disadvantages of two deposit insurance systems. It describes the current situation of China's deposit insurance system. Theoretically and empirically, the papers provides a detailed analyses on the feasibility of China's adoption of an obvious deposit insurance system.