David J. Simmons
FIN 590: Global History of Finance
“Does Government Deposit Insurance Enhance a Country’s Economic Stability?” Dr. Mary H. Kelly
December 9, 2012
Economic crises have been common throughout the last century and have had catastrophic effects on financial markets throughout the entire world. The “Great Depression” of 1929 and the “Savings and Loan Crisis” of the 1980s are examples of monumental financial market failures in history. Greed, corruption, overly aggressive investing, and an inability to forecast changes in the global market have all been catalysts to market failures throughout the world. Systematic financial collapses pose significant challenges to governments and private entities that are employed, empowered, and entrusted to protect the financial interests of the people. As the walls of financial systems come crashing down, it is normally the average citizen who is unprotected and suffers during the aftermath. In an effort to protect the investments of citizens, mitigate risk, and induce economic growth, an early form of deposit insurance was created in New York State in 1829 (FDIC, 1998). Several other states also attempted to institute deposit insurance but they never really hit the mark. It wasn’t until the Great Depression that a truly comprehensive deposit insurance program was created. However, was the implementation of deposit insurance the “end all, be all” answer to stabilizing a country’s economy? In order to answer that question we’ll first define deposit insurance and identify the different methods of implementation. Next, we must analyze both the advantages and disadvantages of utilizing a deposit insurance program. Thirdly, we must analyze how external factors can impact the effectiveness of deposit insurance programs and what controls can be utilized to mitigate these effects. Finally, after analyzing all aspects of deposit insurance, we’ll be able to decide if deposit insurance actually enhances the stability of a country’s economy or not.
Similar to how automobile insurance guarantees to pay for repairs, theft, or loss due to natural disasters, deposit insurance also guarantees to repay funds that are lost when a bank becomes insolvent....