Co-insurance and moral hazard: Some reflections on deposit protection in the UK and USA
- PDF / 151,309 Bytes
- 12 Pages / 609.984 x 779.976 pts Page_size
- 37 Downloads / 172 Views
Volume 5 Number 1
Papers Co-insurance and moral hazard: Some reflections on deposit protection in the UK and USA Peter Cartwright* and Andrew Campbell** *University of Nottingham, University Park, Nottingham, NG7 2RD, UK tel: +44 (0)115 9515 700; fax: +44 (0)115 9515 696; e-mail: [email protected] **Department of Law, University of Wales, Hugh Owen Building, Penglais, Aberystwyth, UK; tel: +44 (0)1970 622712; fax: +44 (0) 1970 622729; e-mail: [email protected]
Dr Peter Cartwright is Senior Lecturer in the School of Law at the University of Nottingham, UK, where he specialises in consumer protection and financial regulation. He is a scientific adviser to the European Credit Research Institute, Brussels, and a member of the UK Department of Trade and Industry’s Advisory Committee on Consumer Law Reform. Andrew Campbell teaches law at the University of Wales at Aberystwyth in the UK. His specialist areas are banking law, corporate insolvency law and commercial law. He is Consulting Counsel on banking law to the Legal Department of the International Monetary Fund, Washington DC, USA.
ABSTRACT This paper looks at the provisions for deposit protection found in the UK and USA in order to examine some of the difficult policy issues that such schemes present. It is argued that one of the principal difficulties with deposit protection is that its main aims (consumer protection and the avoidance of systemic risk) indicate that high levels of protection are necessary. However, high levels of protection are seen to raise the problem of moral hazard, where banks and depositors have insufficient incentives to take
care in their decision making. The USA has focused on moral hazard from the perspective of bankers’ decisions by introducing risk-based premiums. Although this is admirable in theory, it is argued that it is extremely difficult to identify the appropriate premium in practice. The UK has focused its attention on moral hazard as it relates to depositors, and has sought to tackle this by using co-insurance. This paper argues that co-insurance is based upon the premise that consumers are able to make informed decisions about the risks posed by banks, but that this is unrealistic in practice. Furthermore, while coinsurance might, in theory, address moral hazard, it reduces the ability of deposit protection schemes to meet their principal objectives. INTRODUCTION: DEPOSIT PROTECTION AND ITS OBJECTIVES It is widely recognised that deposit protection schemes (sometimes called deposit insurance, deposit guarantees or financial compensation schemes) play a vital role in financial regulation.1 As well as providing compensation to consumers in the event of a firm not being able to meet its liabilities, such schemes help to maintain confidence in the financial system. They therefore play a central role in reducing the likelihood, and effects, of systemic risk. The need for some
Journal of International Banking Regulation, Vol. 5, No. 1, 2003, pp. 9–20 Henry Stewart Publications, 1358– 1988
Page 9
Co-insurance and mo
Data Loading...
