Economic Themes (2012) 50 (4) 7, 535-554
Borko Krstić, Jelena Radojičić
Abstract: Due to the importance of deposits in bank operations and their vulnerability to crisis conditions, deposit insurance is being promoted over the past decades as one of the pillars of modern government-established financial safety network. Creation and implementation of an effective insurance scheme is a difficult task because the excessive bank protection may encourage banks to riskier behavior and destabilize the system that it should protect. The challenge for the designers of these systems is to ensure the protection of depositors without excessive undermining of market discipline. The global financial crisis has highlighted the importance of deposit insurance as an anti-crisis mechanism. By raising the threshold of insurance, the authorities have managed to protect depositors. This helped in the prevention of panic and highlighted the strength of the influence of deposit insurance on the public trust. Experiences have emphasized the importance of a proactive approach to the prevention of future financial crises. Efficient and stable national schemes of explicit deposit insurance are critical for global financial stability. This results in the necessity of their reform, together with achieving a higher rate of legal harmonization at the global level.
Keywords: deposit insurance; financial stability; moral hazard; banking panic
DEPOSIT INSURANCE AS EX ANTE AND EX POST ANTI-CRISIS MECHANISM IN BANKING
Borko Krstić, Jelena Radojičić
Abstract: Due to the importance of deposits in bank operations and their vulnerability to crisis conditions, deposit insurance is being promoted over the past decades as one of the pillars of modern government-established financial safety network. Creation and implementation of an effective insurance scheme is a difficult task because the excessive bank protection may encourage banks to riskier behavior and destabilize the system that it should protect. The challenge for the designers of these systems is to ensure the protection of depositors without excessive undermining of market discipline. The global financial crisis has highlighted the importance of deposit insurance as an anti-crisis mechanism. By raising the threshold of insurance, the authorities have managed to protect depositors. This helped in the prevention of panic and highlighted the strength of the influence of deposit insurance on the public trust. Experiences have emphasized the importance of a proactive approach to the prevention of future financial crises. Efficient and stable national schemes of explicit deposit insurance are critical for global financial stability. This results in the necessity of their reform, together with achieving a higher rate of legal harmonization at the global level.
Keywords: deposit insurance; financial stability; moral hazard; banking panic
