| Deposit insurance system is an important component of financial safety net. Now, Deposit insurance system has been established to protect the benefit of depositors and financial system stability, and achieved positive results in most countries around world since FDIC has implemented it successfully in 1934. China is also actively planning to introduce this system. This paper reviews the literatures on deposit insurance domestic and abroad, and then establishes a model to analyze how the deposit insurance system impacts bank risk. According to disposals of the failed financial institutions, this paper shows that there has existed implicit deposit insurance in China for a long time from the perspective of institutional economics, because Chinese government tried to control financial resources to support economic development at the minimize cost of fiscal expenses. Also, the empirical results show that implicit deposit insurance covers the entire banking industry in China, and incentives bank risk by the means of deposit volume more significantly. As importance of financial stability enhances gradually, implicit deposit insurance has to be reformed.With the development of economic and banking industry, and the improvement of the financial regulatory system and legal system in China, the institutional environment is maturing for introducing explicit deposit insurance system. China should make a timely decision to establish deposit insurance system to consummate the financial safety net to protect the benefit of depositor, based on market mechanism instead of the national credit. By comparing the successful experience of the deposit insurance system in six countries, this paper has discussed some key factors such as the goal, coverage and premium of deposit insurance system in China by drawing on the successful experience of deposit insurance system around world, and analyzes the potential impact from micro and macro perspective when deposit insurance system would be introduced in China.
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