Deposit Protection
Deposit insurance:
There is no evidence that deposit insurance prevents bank runs; on the contrary, once people had found out about the deposit insurance and what it involved in the Northern Rock case, the run intensified. In Greece, people refused to believe that there was a working protection scheme. People began transferring their money outside of Greece to places like Germany. In the UK, we do not have a fund: if a major bank needs to pay out money if it fails, it has to borrow from the Treasury.
Deposit insurance in the United States was mainly to prevent systemic risk: if one bank fails, other banks come into question and people tend to worry. It is also justified as a consumer protection measure. There are disagreements about which of these should take priority (but as long as it does the job, does it really matter?).
Types of scheme:
Explicit schemes are set out in law and established properly. Implicit guarantees by the government are usually less desirable. Almost every scheme set up at the moment is private.
Level of protection:
There are various possibilities - 100% up to a certain amount (we largely have this in the UK (£85,000)); less than 100% up to a certain amount, involving the concept of co-insurance; a mixture of these; and unlimited protection.
Funding of schemes:
There are several potential models: first, payment of a fixed amount on joining the scheme; second, payment of regular contributions on a fixed basis, either expressed as a percentage of total deposits/assets or by some other method; or third, risk based premiums - the safer the bank, the less it has to pay in (this is becoming more popular). This is more fair, as if a bank fails, it is usually the bank that has paid the most money. However, this is more expensive.
Funding policy objectives:
The funding policy depends on what it's trying to do: the size depends on the level of bank failure that is common. Ex-ante funding is building up a fund beforehand. Ex-post takes money from other banks when one fails. You can use a hybrid system, like using ex-post to 'top up' ex-ante funds. The UK doesn't like ex-ante, as it doesn't like to sit on money when there is no crisis - which it should - we are no better than Greece at the moment!! More than 80% of schemes now use ex-ante funding. This has increased significantly over the last few years. The problems with ex-poste funding are highlighted in the Northern Rock crisis.
There is no evidence that deposit insurance prevents bank runs; on the contrary, once people had found out about the deposit insurance and what it involved in the Northern Rock case, the run intensified. In Greece, people refused to believe that there was a working protection scheme. People began transferring their money outside of Greece to places like Germany. In the UK, we do not have a fund: if a major bank needs to pay out money if it fails, it has to borrow from the Treasury.
Deposit insurance in the United States was mainly to prevent systemic risk: if one bank fails, other banks come into question and people tend to worry. It is also justified as a consumer protection measure. There are disagreements about which of these should take priority (but as long as it does the job, does it really matter?).
Types of scheme:
Explicit schemes are set out in law and established properly. Implicit guarantees by the government are usually less desirable. Almost every scheme set up at the moment is private.
Level of protection:
There are various possibilities - 100% up to a certain amount (we largely have this in the UK (£85,000)); less than 100% up to a certain amount, involving the concept of co-insurance; a mixture of these; and unlimited protection.
Funding of schemes:
There are several potential models: first, payment of a fixed amount on joining the scheme; second, payment of regular contributions on a fixed basis, either expressed as a percentage of total deposits/assets or by some other method; or third, risk based premiums - the safer the bank, the less it has to pay in (this is becoming more popular). This is more fair, as if a bank fails, it is usually the bank that has paid the most money. However, this is more expensive.
Funding policy objectives:
The funding policy depends on what it's trying to do: the size depends on the level of bank failure that is common. Ex-ante funding is building up a fund beforehand. Ex-post takes money from other banks when one fails. You can use a hybrid system, like using ex-post to 'top up' ex-ante funds. The UK doesn't like ex-ante, as it doesn't like to sit on money when there is no crisis - which it should - we are no better than Greece at the moment!! More than 80% of schemes now use ex-ante funding. This has increased significantly over the last few years. The problems with ex-poste funding are highlighted in the Northern Rock crisis.