Deposit Insurance, Financial Stability and Moral Hazard

Deposit Insurance schemes provide guarantee for residents' deposits, therefore it does not only turn unstable savings into stable deposits, but also generates "derived deposit" as a result of the new circumstance Consequently, it will also boost economic growth, lower the probability of bank runs, stabilize the financial system effectively and reduce the tremendous social cost that results from the chaos in the financial system However, it will also involve moral hazard, particularly under the condition of single fixed premium rate Adverse selection in most cases leaves deposit Insurance institutions the source of exposure We must take a dialectic view at the moral hazard in deposit insurance, channel relevant actions according to circumstances and take corresponding precautions to minimize the negative effects of moral hazard