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What's wrong with deposit insurance? If I give my money to someone else to hold for me, don't I want some guarantees that they will give it back when I need it?
by natep 16y ago
What's wrong with deposit insurance? If I give my money to someone else to hold for me, don't I want some guarantees that they will give it back when I need it? Or do they cause problems elsewhere?
- eru 16y agoYes, you want some guarantees. But it's the job of either you or your debtor to get those guarantees. Not the job of the general public. The biggest problem is moral hazard. With outside guarantees you don't care about default risk. And debtor will compete solely on return, not on risk-adjusted return. Without an external backer, you will watch your bank much more closely. And banks can't be watched closely enough. The Reserve Bank of New Zealand has a page (http://www.rbnz.govt.nz/finstab/banking/regulation/3256868.html http://www.rbnz.govt.nz/finstab/banking/regulation/3256868.h...) explaining why they don't have deposit insurance in New Zealand.