Economic History

The Reversed Role of Chinese Deposit Insurance

Everyday economics and Chinese Deposit Insurance Secures Healthy Markets
  1. Terry OConnor says:

    I believe that deposit insurance PERVERTS market outcomes rather than enhancing them. “insured” deposits remove the incentive for depositors to shop for banks that rank highly in safety, and therefore “levelize” funding costs for both prudent and imprudent banks. Eventually, with the same funding costs, the bad crowd out the good. This has been apparent in both the Texas S&L crisis and the more recent financial crisis.
    What is more, limiting “deposit insurance” to a specific number, like $250,000, creates a rush by larger depositors into banks they believe have IMPLICIT guarantees (“too big to fail”). This was plainly evident in the 2009-2009 crisis.
    Both features of deposit insurance (its “funding cost” leveling feature, and the limit feature) DISTORT market forces, even though they may produce periods of substantial lending.

    1. Elaine says:

      I always appreciate your insight.

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