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Deposit Insurance

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Submitted By reikou2009
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Deposit insurance tends to increase the likelihood of banking crises, the more so where bank interest rates are deregulated and the organized environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive the coverage offered to depositors, where the system is funded, and where it is run by the government rather than the private sector. The oldest system of national bank deposit insurance is the U.S. system, which was established in 1934 to avoid the extensive bank runs that subsidized to the Great Depression. It was not until the Post-War period, nonetheless, that deposit insurance initiated to spread around the world. Despite its increased service among policy makers, the desirability of deposit insurance remains a matter of some debate amongst economists.
Whether or not deposit insurance is the best strategy to prevent depositor runs, all authors acknowledge that it is a source of moral hazard: as their ability to appeal deposits no longer imitates the risk of their asset collection, banks are encouraged to finance high-risk, high-return projects. As a result, deposit insurance may lead to more bank failures and, if banks take on risks that are correlated, systemic banking crises may become more frequent. The U.S. Savings & Loan crisis of the 1980s has been widely attributed to the moral threat created by a combination of generous deposit insurance, financial liberalization, and regulatory failure. Thus, according to economic theory, while deposit insurance may increase bank steadiness by reducing self-fulfilling or information-driven depositor runs, it may decrease bank stability by inspiring risk-taking on the part of banks. The deposit insurance funds may be achieved by the government or the private sector, and different financing provisions are also observed. Since a number of countries have

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