Market-oriented Interest Rate, Deposit Insurance System and Banking Runs——based on the Dynamic Model Perspective
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| Title | Market-oriented Interest Rate, Deposit Insurance System and Banking Runs——based on the Dynamic Model Perspective
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| Author | Tian Guoqiang , Zhao Yupu and Gong Rukai |
| Organization | Shanghai University of Finance and Economics; he Glorious Sun School of Business and Management of Donghua University |
| Email | gtian@mail.shufe.edu.cn，zhaoyupu@live.cn；gong.rukai@dhu.edu.cn |
| Key Words | Market-oriented Interest Rate; Deposit Insurance System; Bank Runs; Information |
| Abstract | Avoiding bank runs and achieving a smooth transition of financial system in the process of promoting market-oriented interest rate are important theoretical and practical issues faced by transitional economies. This paper sets up a more generalized dynamic bank–runs model by introducing deposit insurance system (DIS) into the classical setting to investigate the boundary conditions of carrying out DIS efficiently in the process of market-oriented interest rate. We show that in the economy with more mature and perfect financial system where the bank has greater information feedback efficiency and faces less possibility of bank runs, the introduction of DIS would achieve good results; however, in the economy with imperfect financial system where market information dissemination is not smooth and the governance level of bank is low, bank would face greater risk of runs if DIS is introduced blindly, especially when unexpected shocks arrive. Moreover, the bank, especially the new private banks, may not adequately understand the risk, so DIS might not only fail to reduce bank runs, but lead to serious moral hazard. Based on the analysis, we provide the following policy implications: In the process of promoting market-oriented interest rate, institutional development on deposit insurance is needed; when introducing DIS, it is required to adopt more stringent regulatory regime to control bank risk correspondingly. The key to further financial system reform in China is introducing DIS and raising the capability of recognizing and processing risks of banking on the basis of improving financial institutional environment gradually. |
| Serial Number | WP656 |
| Time | 2014-08-15 |
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