Impact of Deposit Insurance System on Moral Hazard of Commercial Banks

Abstract

 With the advancement of financial globalization, China, as a country with a trade surplus, exports products to various countries around the world while also absorbing different currencies. In this context, the issue of how to maintain economic security while holding a large amount of foreign currency has become a topic worth considering. To ensure the safety of currency deposits, the government must have sufficient means and the capability to secure the currency. In the long term, the establishment of deposit insurance in China and its impact on the risks associated with commercial banks' moral hazards is of greater concern. Since its inception in the United States, the deposit insurance system has faced considerable criticism. Although its original intention was to stabilize the domestic economy, this system can lead to moral hazard problems in banks, causing excessive lending and an increase in non-performing assets, which in turn undermines the overall stability of the domestic economy and obstructs its steady development. Research on the system has shown that deposit insurance does indeed affect the moral hazard issues in commercial banks. Interestingly, bank size plays a significant role: the larger the bank, the greater the excess, the higher the risk-weighted asset ratio, and the larger the capital buffer. In other words, smaller banks are more likely to face moral hazard issues under the loan insurance system than larger banks.