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Deposit Insurance: Do We Need It and Why?

By  and Anthony M. Santomero and Anthony M. Santomero

Abstract

: Depository institutions play a crucial role in an economy. They create assets to finance a portion of government spending, i.e. deficits, and to support private sector expenditures for everything from plant and equipment to consumer durables. They also and simultaneously serve as a repository for savings, providing a positive return as well as payment services to liability holders. However, these two functions create instability in the financial sector, because illiquid assets are financed by liquid liabilities. For this reason, governments throughout the world have established a financial safety net to insure the stability and integrity of the financial system. A central piece of any regulatory structure aimed at ensuring financial stability is the existence of some sort of deposit insurance structure. However, deposit insurance has its own set of problems. It encourages: (i) risktaking by insured institutions; (ii) neglect by depositors; (iii) intervention by regulatory ..

Year: 1997
OAI identifier: oai:CiteSeerX.psu:10.1.1.41.7100
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