Commercial Bank Management: BANK 201

S M Rehab Uddin
ID: 138227
Assignment 1
Consider the issue of whether or not the government should provide a system of deposit insurance.
Should riskier banks pay higher deposit insurance premiums?
Governments in most countries are too big to fail and have adequate financial resources to follow up bank
runs if it occurs. In countries like the UK, the government takes responsibility if a bank run occurs.
Customers can claim their percentage of deposits or capped amount from the government itself. UK's
deposit insurance (FSCS) is theoretically funded by levies on banks but also the taxpayers and financial
compensation scheme themselves has been a major contributor. In this sense, riskier banks can make their
customer feel safe during a crisis. For no depository system countries like the New Zealand, there is
always uncertainty among the banks and thus their banks are mainly supervised by the biggest bank of
Australia. However, no system of banking is safe from financial shocks. Even in resilient banking
systems, occasional bank failures may occur.
Introducing fairness into the system bolsters industry support for deposit insurance. A healthy and well-
capitalized bank would have more value increments compared to the one that isn't. If premiums are
proportionate to the risks, it would provide incentives to banks owners and managers to evade excessive
risk taking, moral hazard minimization and also introduce more fairness into the premium assessment
process.

References:
http://digitalcommons.kennesaw.edu/cgi/viewcontent.cgi?article=1140&context=georgia_archive
https://www2.bc.edu/hassan-tehranian/Hassan%20published%20paper/The%20Impact%20of%20Risk-
Based%20Premiums.pdf
http://www.stuff.co.nz/business/opinion-analysis/78727017/how-safe-are-your-deposits-if-a-bank-fails
http://www.mydigitalfc.com/insurance/deposit-insurance-higher-premium-riskier-banks-363