Question

The spread of government deposit insurance throughout the world. In your opinion, is this a good thing? Justify your arguments.         

Answer 1

If deposit insurance is spread out throughout the world, then it is definitely not a good thing for the following reasons:

1. Deposit insurance with all clients would create a risky situation for banks as the banks who lend money may still fail to meet immediate liquidity requirements of clients holding such insurance.

2. This could damage reputation and cedutworthiness of the bank

3. Being strictly tied to not lend easily to outsiders would hurt banksmargins in the long run.