Deposit insurance: Friend or foe?

Abstract

Following the Global Financial Crisis many governments have undergone reform to ensure stability in financial markets. One mechanism adopted throughout many jurisdictions is deposit insurance. The Reserve Bank of New Zealand has chosen not to adopt such regulation. This essay criticises this decision. The current regulatory framework leaves depositors vulnerable to losses upon bank failure. Upon bank failure recovery is largely subject to the discretion of the Minister. This provides uncertainty in the markets, and consequently aggravates the risk of banks runs and a contagion risk. Adopting a suitably designed deposit insurance scheme will remove this uncertainty, create confidence, and increase the stability of the banking sector.