The Moral Hazard Of Deposit Insurance System

The deposit insurance system has a significant impact on the protection ofthe depositors' benefits and the operation of the country's financialsystem, but there is probably moral hazard in it. Under the system banksintend to seek high risk investment and would damage the financialsystem if the investment failed. The passage studies the moral hazardunder the deposit insurance system with the utility theory and the gametheory, and draws the conclusion that it is necessary to implement thecompulsory deposit insurance, levy diverse premium on banks withdifferent credit ratings and apply non-full amount insurance and set amaximum amount to avoid the moral hazard effectively.