THE ROLE AND EFFECTS OF DEPOSIT INSURANCE PRACTISES IN PREVENTING BANK-BASED RISKS

Abstract

Deposit insurance, which constitutes one of the three pillars of the financial security network, is a widely used application in the world to provide financial trust and stability in the banking sector. The number of countries applying deposit insurance has increased steadily after the 2008 global crisis. Despite the positive aspects of deposit insurance, such as helping depositors to trust the financial system, preventing the effects of systemic risk in the banking system, it is also criticized for reasons such as encouraging banks to take excessive risk and causing moral hazard. Relationships between deposit insurance and systemic fragility and other bank risks are explored in detail from the 2008 financial crisis. It is observed that the moral hazard effect of deposit insurance is more dominant in the normal operating periods of the economy and the sedative effect is more dominant in times when the economy is turbulent. This study analyzed the effects of the risk of bank deposit insurance in Turkey. In periods when the economy and / or financial system is fragile, deposit insurance is not seen as sufficient alone in preventing bank-borne risks. However, in our study, it was concluded that the application of deposit insurance is more successful if it is implemented together with an effective regulatory and supervisory system.