A Comparison On Deposit Insurance System Of The U.S. And Germany

Deposit insurance system has been noticed all over the world for a long time. This is because as an important part of financial safety-net, deposit insurance system has played a great role in protecting the depositors'interests and maintaining finance stability. Even though, there are also some opposite opinions to the effects of deposit insurance. Many experts thought that some side-effects are still available. First of all, moral hazards will be made under a deposit insurance system. Without this system, they will restrict each other tightly between depositors and banks. For one thing, depositors are full filled with self-defense capabilities to know different situations of banks and supervise them closely. For another thing, as concerned as banks are, self-supervision should be strengthened by trading low-risking in order to increase public confidence. However, under a deposit insurance system, both depositors and banks lack supervision and self-supervision. As a result, moral hazards have deteriorated. Secondly, a deposit insurance system leads to unfair competition between institutions. This means well-traded institutions often pay a higher premium than bad-traded ones. It unfairly penalizes low-risk institutions by, in fact, having them subsidize higher risk institutions. Last but not least, a deposit insurance system causes agency costs. This kind of costs means that deposit insurance institutions might benefit on behalf of some special groups, not the public.From the practices of nearly 100 countries, it turns out that deposit insurance system has done a great success. In America, Glass-Steagall Act was passed as a symbol of contemporary deposit insurance system. Months later, the U.S. Congress created the FDIC to serve in the role as an insurer of deposits. Besides playing as a pay box, FDIC can also do other jobs such as finance checking, early intervention and, what's more, supervising. To some extent, FDIC is a typical"risk-minimizing"system. In the first 50 years from 1933, financial stability and confidence prevailed in the banking system. Financial crises have never happened again until the 1980s. At that time, ushered in a period of prolonged economic distress. In 1991, Federal Deposit Insurance Corporation Improvement Act implemented a risk-based premium system instead of the flat-rate one which has been created nearly 60 years. It's no doubt that the Act is another turning point of the Federal Deposit Insurance. It avoided unfair competition inside efficiently and decreased moral hazards sharply. In the following years, the Federal Deposit Insurance was running smoothly and made a successful example for other countries and areas. In Germany, the deposit insurance system was founded in 1975. It really has done an incredible job in the past 30 years. Only a few institutions went bankrupt, but never huge crises happened. Obviously, all these jobs were liable to forcible laws, strict supervision and cooperation between institutions. The huge success of these two countries is increasingly noticed by more other countries and areas.For a long time, the government has provided implicit insurance to banks. It not only brought financial problems to government, but also led to the failure of currency policy. For that reason, we should do every effort to complete financial safety-net and maintain finance stability. Moreover, a suitable deposit insurance system would be a must to accomplish the goal. It's high time to establish our own deposit insurance system because both outside and inside advantages are available. However, the disadvantages, especially moral hazards and adverse selection, should be paid more attention to solve. So the most important thing we have to do is improve the financial safety-net and enhance the quality of supervision. I believe that the deposit insurance system of our own is on the horizon.