发布时间：2020-12-08 热度：
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金融论文范文
Deposit insurance plays a very important role in contributing to financial stability of the economy. Most developed countries around the globe have deposit guarantee system. It is a form of government intervention to safe guards the depositors during the bank failure. This system also contributes in reducing the systemic banking breakdowns. The safety net arrangement creates confidence to consumers on their money deposited with the banks thereby reducing the bank runs. On the other side when the deposit insurance system is not designed properly can give rise to bank crisis as it gives incentive to the banks to take excessive risks.
Bank run is type of financial crisis, it occurs when large number of depositors withdraw their money at the same time fearing the bank might become insolvent. This action will cause serious liquidity problem which leads to failure of Bank. The financial industries have its roots across different countries a failure of one institution may lead to the failure of another and can threaten the financial stability.
United Kingdom observed a major bank run after a century during the Northern Rock crisis in September 2007. Northern Rock was a Fifth largest mortgage lending bank in UK, relied heavily on the wholesale market for its funds, a world wide liquidity squeeze caused funding problem to the bank. Further, run on bank caused a serious liquidity problem to the solvent bank. From 14th to 17th September 2007 long queues of depositors were found outside the branches of Northern Rock. In theory with depositors being protected such a bank run should not have occurred.
The depositors in United Kingdom are protected by Financial Services Compensation Scheme (FSCS). It is an independent body it has been offering protection to depositors since 2001, it covers all the firms authorised by Financial Service Authority. The run on the bank was a test to the insurance arrangement in United Kingdom. I use the experience of Northern Rock crisisI show how the bank run occurred with the liquidity insurance model of Diamond and Dybvig (1983). According to this model bank run occurs due to self fulfilling behaviour of the depositors. I relate the run on the Northern Rock bank to this model, I extended the model by showing that information on the bank is initial cause of the bank run. In other words the run on Northern rock bank was not only speculative but it also had a fundamental origin. I analysed the effectiveness of deposit insurance, which according to the model is very effective solution in preventing the bank runs.
FSCS until September 2007 used co-insurance system to protect depositors. Co-insurance system do not provide 100% protection to the depositors, it involves the depositors to take part in the risk of loss. This system is employed to reduce the moral hazards. In other words this system gives incentive for the depositors to monitor on the banks activity. I study the role played by deposit insurance system during Northern Rock crisis. The system failed to protect the majority of depositors and it also did not play its role in preventing the bank run. Professor Willem Buiter commented on the deposit insurance arrangement in the UK during the crisis as a shambles (House of Commons, fifth report of session 2007-2008). My study show the co-insurance system will be very risky at the time of bank crisis. I have argued against the co insurance model with the experience of Northern rock crisis, this system did not work effectively because it was very difficult for the consumers to understand the concept. Furthermore expecting the consumers to judge the funding risks of the banks is unrealistic.
The Northern Rock crisis shows that the consumer understanding and the awareness about the deposit insurance system play an important role in preventing the bank run. As there are many recent designs and new measures to prevent bank runs and reduce moral hazards, we show they must account for a fundamental aspect, as a complex insurance system will be very difficult for the public to understand and will fail to create confidence. I discuss a correct level of compensation limit that UK must have to protect majority of depositors in UK with a statistical data and gross domestic per capita income of the country. I analyse the corrective measures in the insurance arrangement for UK, aimed at improving the financial stability.
