Incentive compatibility and the optimal design of deposit protection schemes: An assessment of UK arrangements

Late in 2001, the Financial Services Authority (FSA) introduced a new set of arrangements for deposit protection in the UK. While the changes involve a welcome improvement on previous arrangements, much more could be done to enhance their overall cost-effectiveness. This paper explains the flaws in...

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Bibliographic Details
Published in:Journal of financial regulation and compliance 2002-06, Vol.10 (2), p.115-134
Main Author: Hall, Maximilian J.B.
Format: Article
Language:English
Subjects:
Adverse selection
Bank deposits
Bank management
Banking
Banking industry
Best practice
Compliance
Conflicts of interest
Deposit insurance
Deposit protection schemes
Design optimization
Finance companies
Financial services
Financial Services Authority
Institutional investments
Insurance coverage
Merchant banks
Moral hazard
Regulation of financial institutions
Studies
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Summary:Late in 2001, the Financial Services Authority (FSA) introduced a new set of arrangements for deposit protection in the UK. While the changes involve a welcome improvement on previous arrangements, much more could be done to enhance their overall cost-effectiveness. This paper explains the flaws in previous and current arrangements and, using a relatively crude but nevertheless objective measure of the extent of their compliance with International Monetary Fund (IMF) best practice 'rules', compares their degree of 'incentive-compatibility' (or economic efficiency - ie the extent to which they minimise the problems created by adverse selection, moral hazard and principal agency conflict) with the counterpart schemes operating elsewhere in the European Union and beyond. In this way, areas for future improvements are identified, which will ideally require accommodating changes in the guiding Deposit Guarantee Schemes Directive.
ISSN:1358-1988
1740-0279
DOI:10.1108/13581980210810157