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Adrian Leonard: The trouble with deposit insurance

Written by Adrian Leonard Tuesday, 05 February 2013 20:02
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Adrian B. Leonard is currently an Affiliated Researcher at the Centre for Financial History, University of Cambridge.

 

His work focuses on the financial history of London insurance. Before returning to academia, he spent nearly two decades as a financial writer, journalist, and communications advisor, including for the International Underwriting Association of London. 

Executive summary

  • Deposit insurance has been proposed as a remedy for losses arising from bank failures.
  • Insurance was invented in the fourteenth century by Italian merchants. Its structure has remained relatively unchanged ever since.
  • Insurance reimburses money actually lost due to specific events, but only after payment of a premium based on a probabilistic calculation of the likelihood of loss.
  • If no such probabilistic assessment of risk can be made, true insurance cannot be underwritten, although wagers can be made upon uncertain possible outcomes.
  • Deposit insurance, which protects depositors' bank balances, is not genuine insurance, because no probabilistic assessment of risk can be made.
  • Existing organisations which provide deposit insurance have insufficient assets to indemnify lost deposits in cases of multiple bank failures, and in practice rely instead upon state guarantees.
  • The private insurance industry has assets grossly insufficient to insure bank deposits.
  • A risk-based assessment of premiums for deposit insurance, if it was to provide adequate income for the insurer, would make deposit insurance prohibitively expensive.
  • The state, therefore, is the only body in a credible position to guarantee private bank deposits.

To read the whole article goto:

 

http://www.historyandpolicy.org/papers/policy-paper-139.html#S9

 

Last modified on Tuesday, 05 February 2013 20:08

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