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Is deposit insurance really a good idea? (“Reserve Bank deposit insurance is good news for savers”, April 26). While the new Corporation for Deposit Insurance (Codi) is dressed up as consumer protection, it is unlikely to be helpful as a social institution.
The professed benefit is increased competition for deposits. Current consumers are unwilling to accept higher deposit rates from banks they don’t trust, preferring lower rates from banks with strong brands. Under Codi, since all banks will be covered equally consumers may feel less hesitant. But is this not the very definition of moral hazard?
If all banks are perceived to be the same in consumers’ eyes, what incentive would a bank have to build a reputation around prudence and fiscal responsibility? If rogue banks are insured and can chase risky application of their deposits, what remains to keep them disciplined?
Trust and brand are currently earned and paid for by the banks themselves. With reputation no longer relevant, who pays? Clearly the new insurance costs have to be paid by someone, and that is inevitably the consumer.
Will it prevent the feared runs? Unlikely. Subpar banks will continue with bad practices, no longer held accountable for their decisions. Who bears that burden? The taxpayer, of course.
While shareholders may continue to instil some conservatism, at the margin live the reckless. This bill shifts the risk from the banks and their customers to the taxpayer, creating poor incentives for good behaviour.
If deposit insurance was such a good idea, why aren’t private insurance companies offering it to their customers?
Neil Emerick Free Market Foundation
JOIN THE DISCUSSION: Send us an email with your comments to letters@businesslive.co.za. Letters of more than 300 words will be edited for length. Anonymous correspondence will not be published. Writers should include a daytime telephone number.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
LETTER: Deposit insurance questions
Professed benefit is a moral hazard
Is deposit insurance really a good idea? (“Reserve Bank deposit insurance is good news for savers”, April 26). While the new Corporation for Deposit Insurance (Codi) is dressed up as consumer protection, it is unlikely to be helpful as a social institution.
The professed benefit is increased competition for deposits. Current consumers are unwilling to accept higher deposit rates from banks they don’t trust, preferring lower rates from banks with strong brands. Under Codi, since all banks will be covered equally consumers may feel less hesitant. But is this not the very definition of moral hazard?
If all banks are perceived to be the same in consumers’ eyes, what incentive would a bank have to build a reputation around prudence and fiscal responsibility? If rogue banks are insured and can chase risky application of their deposits, what remains to keep them disciplined?
Trust and brand are currently earned and paid for by the banks themselves. With reputation no longer relevant, who pays? Clearly the new insurance costs have to be paid by someone, and that is inevitably the consumer.
Will it prevent the feared runs? Unlikely. Subpar banks will continue with bad practices, no longer held accountable for their decisions. Who bears that burden? The taxpayer, of course.
While shareholders may continue to instil some conservatism, at the margin live the reckless. This bill shifts the risk from the banks and their customers to the taxpayer, creating poor incentives for good behaviour.
If deposit insurance was such a good idea, why aren’t private insurance companies offering it to their customers?
Neil Emerick
Free Market Foundation
JOIN THE DISCUSSION: Send us an email with your comments to letters@businesslive.co.za. Letters of more than 300 words will be edited for length. Anonymous correspondence will not be published. Writers should include a daytime telephone number.
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