Analysis On China's Deposit Insurance System

The deposit insurance system (DIS) plays important role in most developed countries' financial system, and is considered to be one of the three basic elements for the financial security network. When the insured banks have liquidity difficulties and be faced with the possibility of bankruptcy, they can get the financial aid from deposit insurance institutions according to the insurance contract, therefore protecting the benefit of the depositors as much as possible. The modern deposit insurance system was first founded in the USA in the thirties of 20th century. After that, Canada, France, Germany and Japan and other developed countries followed the US example to set up the deposit insurance system. At present, this kind of system has been set up in 72 countries and districts. As above, deposit insurance system has developed quickly in western countries.Although every country's deposit insurance company has it own formation, they share the same basic running aims. That is: the benefit of the depositors is in the first place, second, producing a proper dealing process for those banks that are facing bankruptcy, hence increasing the public confidence for banks and make sure the banks running smoothly and safely. Because of different situations in different countries, there are great variances in the deposit insurance systems around the world. For example, there are public and private operations in the system, and we can see a difference between compulsive insurance and voluntary insurance. In the respect of fund-raising method, premium rate and highest amount insured, there are some differences too. The way the countries dispose of these problem is not the same that whether to put the foreign currency deposits, inter-bank loans, the deposits in the branch of foreign banks and the deposits in the branch abroad of our banks into the range of subject-matter insurance. This kind of versatility can be good example for the construction of our own deposit insurance system, we can learn very important lessens from those examples, such as: an abundant insurance fund, the insurance amount should be as low as possible, the insurance institutions free from the interruption of the government, the premium should fully embody the degree of risk.Nevertheless, there remain some critical problems in running of the deposit insurance system in spite of the great success during its past over 70 years. The biggest problem is considered to be in the moral hazard and adverse selections resulting from DIS. These areall the forms of expression of moral hazard that depositors weaken the selection and supervision to the banks, banks insured prefer to taking up the high-risk activities and the regulation agency connives at banks to bear the excess risk. Adverse selection means that the financial institutions with high risk buy insurance positively, but the safe and steady ones are reluctant to insure in order to cut down the cost, thus with these kinds of things happening, the whole deposit insurance system will collapse. The behaviors with moral hazard and adverse selection hinder the optimum recourse allocation and leads to the losses of social welfare. Some positive and effective measures must be taken to control them, which should be composed by a whole set of tactics including differential premium rate market restriction, capital adequacy regulation etc.At present, according the reality in our country and following the examples of foreign countries, the establishment of DIS should include two aspects: one is the building of the whole frame, including standardization of the financial operating environment, perfection of law and foundation of DIS. The other is determination of the operating mode, including the right definition of the DIS institutions, DIS' functions the insurance target, the DIS premium rate, coverage standard, the usage of the DIS funds, and the operation details of the deposit insurance system.All in all, the study of the birth, the development, and the nowadays situations of the DIS with the proper assess of the function of DIS, especially a clear knowledge of the cause of the bad aspect, will serve as a perfect foundation for the establishment of the DIS which suits our country soundly.