Luardo, Nicolas Brent
1. Indeed, bank deposit insurance policy is necessary because it limits or excludes the risk of
depositors being able to position funds in a bank suffering a failure. And it provides security for
household and small business investments, which may reflect life savings or balances of critical
purchases.
The advantage of an insurance coverage is that it reduces the burden on public expenditure in
times of crisis. It also provides depositors with a fair amount of certainty with respect to their
ability to quickly withdraw the deposit. And It constitutes part of the international standards,
including standards set by the OECD and the Financial Stability Board (FSB). However, there are
also disadvantages like it increases the moral hazard since it encourages the management and
shareholders of the bank to take larger risks in order to increase profits. And It also reduces
market discipline because it undermines the motivation of depositors to monitor the risk
inherent in management’s behavior and the depositors’ motivation to take sanctions— by
withdrawing deposits—when the risk increases. And another is that It could increase the prices
of banking services if the banks impose the financing costs of the insurance mechanism—even
partially—on depositors.
Its advantage is that in times of disaster, it decreases the cost of public spending. It also gives a
reasonable degree of assurance to depositors with regard to their right to withdraw the deposit
quickly. And it forms part of international norms, including those established by the OECD and
the Board of Financial Stability (FSB). The disadvantage is, it could increase the danger as it
allows the bank’s management and owners to take greater risks to maximize profits. And it also
lowers market discipline because it reduces depositors‘ incentive to watch the risk implicit in the
actions of management and the motivation of depositors to take penalties as the risk rises by
removing deposits.