Analysis On The Establishment Of Deposit Insurance System In China In The Context Of Financial Crisis

In the end of 2008, financial crisis which resulted from subprime loan in America spread quickly and evolved into a global storm. This financial crisis first occurred in financial market, and then fast spread to the real estate, manufacturing and other entities in economy. At the same time, the financial crisis happened in United States at first, and then immediately affected Western Europe, Japan and other countries and regions, which made the global economy suffering serious losses. As the center of this financial storm, large scale bankruptcy phenomenon hasn't occurred in American banking sector. So it can be said that there is considerably relationship between the strong risk-resisting ability of American banking sector and its matured deposit insurance system.In this financial crisis which swept all over the world, Federal Deposit Insurance Corporation in America temporarily raised the deposit insurance limit from 100,000 U.S. dollars to 250,000 U.S. dollars, in order to prevent public's run on deposits and avoid further disorder in financial market. Along with applying deposit insurance system to nationalize commercial banks which faced with bankruptcy, some European countries also decided to lift the deposit insurance limit from 20,000 Euros before financial crisis to at least 50,000 Euros, in order to stabilize depositors'confidence in banking sector and ease financial crisis.It is very necessary to establish an appropriate deposit insurance system in China as a big country in household savings, while encouraging people to invest and consume. Until now our deposit insurance system hasn't been taken into practice after this subject has been discussed over 16 years. It is partly because the technical operation level has not yet matured, and on the other hand, if the design has flaws it will lead to deterioration in operating conditions of the entire banking sector, taking moral hazard and adverse selection resulting from deposit insurance system into account.After the outbreak of financial crisis, deposit insurance system hasn't yet established which should be set up in 2009 on schedule. This measure is comprehensive, because after financial crisis the establishment of deposit insurance system is likely to cause public's panic mentality and losing confidence in our economic environment. So it is prudent to suspend the implementation. However, I think the drawbacks should not be a reason to reject the feasibility of deposit insurance system. Therefore, this thesis aims to make some valid observations and recommendations on designing a deposit insurance system not only consistent with our national conditions, but also effectively preventing moral hazard and adverse selection.This thesis is totally divided into five parts:At first, it introduces the significance of selecting this topic from the background of financial crisis and the status of banking sector, while summarize the research results about deposit insurance system at home and abroad. Foreign scholars began with Bryant's discussion on the need of establishing deposit insurance system in 1980, earlier than our country; along with deposit insurance system establishing and developing in western countries, more people started to pay attention to problems and negative effects of this system and further discussed the relationship between deposit insurance system and external environment. Researches on this topic started later in our country, which mainly concentrated on feasibility in establishment, system design and how to prevent moral hazard.The second part tries to sum up lessons to our country through introducing the establishment, development, reform of deposit insurance system in America. At first it defines the concept of deposit insurance system and classification, and then describes the objectives and duties of Federal Deposit Insurance Corporation under the background of the Great Depression in 1929; savings and loan crisis in 1980s promoted federal deposit insurance system to reform, such as implementing different rating system based on risk, raising deposit insurance limit, larger and more flexible regulatory authority, etc; in this financial crisis, Federal Deposit Insurance Corporation has taken partly full insurance, providing large guarantee, increasing penalties and other measures in time to avoid large scale bank failures, and played an extremely important role in resolving financial risk and maintaining financial stability. So we can sum up that the operation of deposit insurance system must be accompanied with a sound legal system, at the same time it should be flexibility according to the circumstances, instead of missing best time to launch because of demanding perfect.The third part analyzes moral hazard and adverse selection problems caused by deposit insurance system, which is the key point why deposit insurance system has been criticized by many scholars. This part firstly discusses the source of moral hazard from depositors, insured banks, deposit insurance agencies and regulators, then correspondingly suggest to set deposit insurance limit, implement different rating system based on risk, strengthen routine supervision, standardize internal corporate governance of insured banks and so on. Secondly, it proposes to implement compulsory deposit insurance system and different rating system based on risk, correspondingly to voluntary deposit insurance system and single rating system which causes adverse selection.The fourth part is the main part of this thesis. According to the introduction and analysis before, combined with financial crisis and our national conditions, I believe that it is quite necessary to establish deposit insurance system. It will not only strengthen public's confidence in banking sector, but also help to build equal competition environment between state-owned commercial banks and non-state-owned commercial banks. I propose to set a five to ten years transitional period in the initial of establishing deposit insurance system, during which the following measures can be considered: 1.framing a sound legal system and information disclosure mechanism; 2.implementing compulsory deposit insurance system; 3.carrying out full deposit insurance payment system; 4.applying different rating system based on risk; 5.executing an independent rural deposit insurance system.At last, through the second part summing up lessons of federal deposit insurance system, we can conclude that deposit insurance system is helpful to prevent financial risks and maintain financial stability, so establishment of deposit insurance system in China has an extremely important positive significance to current financial environment. Finally, I think it should be placed in market economy then adjust to the practice, instead of seeking to set up a perfect deposit insurance system.