Deposit insurance Ireland

 

 



 

 

Financial uncertainty inevitably leads to the revival of proposals for safety schemes. A popular one is deposit insurance, such as the comprehensive one introduced last week by Ireland’s six banks with government backing.

At the weekend, Germany also guaranteed all deposits to prevent a panic caused by the failure of a rescue plan for a leading mortgage lender, Hypo Real Estate.

Deposit insurance is popular with voters and New Zealand, with Australia, is unusual in not having a scheme.

A recent OECD report, Financial Turbulence: Some lessons regarding deposit insurance, covers some of the latest research. It cites a study of banking crises from the 1980s to the mid-1990s that found the presence of an explicit deposit insurance scheme “tends to increase the probability of such events.”

Another showed that in institutionally weak environments, such schemes “increase the probability of systemic banking problems.”

They are also not required under the 1997 Core Principles of Effective Banking Supervision prepared by the Basel Committee on Banking Supervision, which supervises central banks.

Deposit insurance has the advantages of creating financial stability and ensuring problems in one bank do not spread to another.

The downside comes from the increased risk of imprudent behaviour, as depositors are unlikely to withdraw funds that are not at risk, though this can be limited by caps or co-insurance in which the amount covered is less than 100%, and depositors are required to bear part of the costs of a banking failure.

 

 

 

 

 


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