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moral hazard and deposit insurance March 12, 2009

Posted by Bradley in : Uncategorized , trackback

The Basel Committee on Banking Supervision and the International Association of Deposit Insurers today published a Consultative Document on Core Principles for Effective Deposit Insurance Systems (comments due May 15). Unsurprisingly, it seems that deposit insurers aren’t completely happy about the ways in which recent events have transformed deposit insurance systems. For example, Principle 10 reads:

Transitioning from a blanket guarantee to a limited coverage deposit insurance system: When a country decides to transition from a blanket guarantee to a limited coverage deposit insurance system, or to change a given blanket guarantee, the transition should be as rapid as a country’s circumstances permit. Blanket guarantees can have a number of adverse effects if retained too long, notably moral hazard. Policymakers should pay particular attention to public attitudes and expectations during the transition period.

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