Deposit protection system’s design and effectiveness
Journal of Banking Regulation, 2015, vol. 16, issue 1, 51-63
An essential aspect of deposit protection schemes is that they should be surrounded by strong financial structures. In addition to external prerequisites, focusing on the design of a deposit protection regime can profoundly minimise its limitations, most particularly moral hazard, and benefit its mandate. This article examines two critical design features of a deposit protection system: funding and coverage. The funding and coverage arrangements shape a system’s ability to promote confidence with depositors, and hence financial sector stability. The author argues that the effectiveness of such systems will remain ambiguous, unless an appropriate deposit protection coverage limit is reached, government guarantees are eliminated and their role during a crisis is more defined.
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