Moral Hazard, Bank Governance and the Protection of Depositors

Abstract:     
This article explores the consequences of the general increase in deposit insurance coverage that has occurred in the present crisis for bank governance, moral hazard and the viability of deposit protection in the future once countries return to ‘normal times’. It argues that deposit insurance needs to be explicit but limited, that countries need to implement resolution regimes that can cut in rapidly and resolve banks without any loss of access to their funds by depositors. Furthermore it suggests that countries need to implement ‘going concern’ resolution methods for larger banks, which involve the use of contingent capital so vital functions do not stop operating. Lastly it addresses the problem of cross-border banks, suggesting that while deposit insurance may not need to be coordinated resolution and supervision most certainly do.

Keywords: deposit insurance, moral hazard, resolution methods

JEL Classification: G21, G28, G01

working papers series