Research On Deposit Insurance System In China Based On Moral Hazard

Since finance is the core of economy, financial security has become a vital factor influencing economic security and even national security. In a financial system dominated by indirect finance, bank security is the basis of financial security. As the traditional"center of depositor and debtor", bank security, on one side, is the safety of credit application, on the other important side, is to insure the safety of deposit. For the safety of deposit, bank should prevent massive loss of deposits and the domino effect caused by depositors'panic bank run, which may brought destructive effect to the whole banking system. Aiming to maintain depositors'confidence, protect depositors'interests and avoid bank run, deposit insurance system is a fundamental system arrangement designed to urge bank to lower its risks and operate soundly and to maintain safety and stability of financial system. Deposit insurance system is now an important part of national financial security network.Since its establishment in 1930's, deposit insurance system has a history of over 70 years so far. Till now, 95 countries and regions have implemented deposit insurance system, with both successful experience and lessons of failure. Moral hazard is one of the major defects of current deposit insurance system.Having possessed the insurance from insurance companies, the bank depositors no longer take precautions, thus lead to higher accident frequency and consequently bigger loss for insurance companies. Moral hazard arises because the protection provided by deposit insurance system to the depositors lowers the risk awareness of depositors and deposit-taking financial institutions, encourages deposit-taking financial institutions to be engaged in high risk activities and as a result, harms the interests of financial system, depositors and deposit insurance fund. Therefore, moral hazard exists both in implicit deposit insurance system and explicit insurance deposit system. From the perspective of preventing moral hazard, the dissertation conducts in-depth analysis and research into the moral hazard problem in deposit insurance system, by comprehensively applying the theory of modern economics, finance and management, and adopting the research method of combining qualitative analysis with quantitative analysis and utilizing both horizontal and vertical comparison. Meanwhile, through taking advantage of international experiences and probing into the realistic national conditions of China, the dissertation proposes its design of explicit deposit insurance system on the basis of moral hazard prevention, which is of certain theoretic and realistic significance.The dissertation is composed of three parts:Part one is the theoretic analysis of moral hazard in deposit insurance. This part systematically sorts related theories of deposit insurance and moral hazard, analyzes the rationality of existence of deposit insurance system, the root of moral hazard and moral hazard under different circumstances, and investigates the measures taken by the United States and Japan to improve deposit insurance system and to prevent moral hazard. This part is expected to lay theoretic foundation for further research on establishment of bank deposit insurance system and prevention of moral hazard.Part two is concrete analysis of deposit insurance system and moral hazard in China. Comprised of Chapter Three, Chapter Four and Chapter Five, this part is the core of the dissertation.This part mainly analyzes the risks faced by banking industry in China, studies the moral hazard problems existing in current implicit deposit insurance system in China, compares implicit deposit insurance system with explicit deposit insurance system in credibility basis, rules and procedures, financial costs, degree of protection and etc., analyzes the possible change of moral hazard if the implicit deposit insurance get explicit, and shows the feasibility and necessity of implementing deposit insurance system in China. On the premise of fully considering risks, costs and benefits, this part refers to sound pattern experiences of explicit deposit insurance system and takes into account of the requirements of national conditions in China, brings up suggestions about deposit insurance system in China in such aspects as risk premium system, limit of insurance coverage and reinforcement of supervision mechanism and functions. This dissertation specifically expounds on the premium-taking issue if explicit deposit insurance system actually be carried out in China, and suggests that an ideal pattern of transiting from"managed floating differentiated premium system"to"risk-based differentiated premium system"should be applied in the primary stage.Part three is the design of explicit deposit insurance system in China based on moral hazard prevention. From the perspective of preventing moral hazard, this part designs the major contents of deposit insurance system in China and sets forth suggestions regarding improving implementation environment of deposit insurance system.The innovation of this dissertation might be manifested in following areas:Firstly, it systematically analyzes moral hazard under current implicit deposit insurance system and after the implicit deposit insurance get explicit (Chapter Three), carries out cost-benefit analysis of implementation of explicit deposit insurance system. It is found that the establishment of explicit deposit insurance system in China not only can reduce moral hazard of banking industry, but also may bring much more benefits than costs to bank.Secondly, in terms of preventing moral hazard of deposit-taking institution, it proposes a tentative plan of transiting from"managed floating differentiated premium rate system"to"risk-based differentiated premium rate system"in China and assesses the risk-based differentiated premium rate in China by utilizing Ronn and Verma's option pricing model and factor pricing scoring model.Thirdly, in terms of preventing moral hazard of depositors, it is advised that reasonably setting up deductibles and upper limit helps to strengthen the depositors'external constraint on banks and reduce moral hazard in deposit insurance system. The opinion is clearly stated that the setting of insurance coverage limit should be of certain flexibility and claim management limit of current deposit insurance in China should be higher than world average level.Fourthly, in terms of preventing moral hazard of regulators, it declares that deposit insurance system with certain supervisory function contributes to the realization of bank's prudential supervision goal and the enhancement of supervision over risks in banking industry, which is a necessary supplement and improvement to banking supervision system. It also puts forward function division scheme and information sharing methods between deposit insurance companies and China Banking Regulatory Commission in respect of supervision.Due to the limitations of materials and the author's research level, especially the latter, many issues haven't been studied deeply enough in this dissertation. There are still some problems worth further research: firstly, in-depth research could be done to key indexes and modified range, which are the focus of attention when the system changes; Secondly, since deposit insurance system has not been established yet, empirical study based upon China's national conditions can not be carried out. The tentative plan proposed here requires the test of practice and should be improved and perfected during the process of implementation.