1 Rationales for Creating a Deposit Protection System

Subject(s):

Deposit insurance schemes — Deposit protection schemes — Financial stability

A deposit protection system’s rationale is a key starting point in understanding its design and role within a financial safety-net system. A weighting towards the’ protection of depositors’ objective implies a system with a low coverage level, while a weighting towards promoting financial stability will lead to high coverage levels. The objective of depositors’ protection often means the existence of a ‘pay box’ mandate, while financial stability requires broader powers for the deposit insurer in addition to its payout mandate. This chapter uses the UK regulatory regime as its main reference point and tries to explore the full potential of an effective deposit insurance system.