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Abstract
Over the past fifteen years, almost three fourths of the member countries of the International Monetary Fund have faced crises in their banking systems. These crises have led many countries to consider or to adopt deposit insurance to protect their financial systems from the impact of bank failures. Although the special importance of banks to a country’s economy might seem to make the insurance of their deposits unquestionably worthwhile, the reality is not that simple. Banks are also businesses dedicated to making a profit in an uncertain market. As such they can take chances, overextend, and act imprudently. Banks are indispensable for the smooth running of an economy, but should society be unconditionally responsible for underwriting banking decisions, even those incautiously taken? Should folly be rewarded? Government authorities must tread a fine line between assuring the health of the banking system and encouraging recklessness on the part of individual banks by overprotecting deposits. Deposit insurance can therefore have pitfalls as well as benefits—ill-conceived deposit insurance schemes could seriously harm an economy.
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