In doing so, he revisits the specific goals of deposit insurance, and the benefits of reaching these goals. But he also sketches inherent limitations and trade-offs. One well known trade-off stems from moral hazard, or weakening of market discipline. It is less appreciated that deposit insurance may actually attenuate some aspects of moral hazard.
Deposit insurance is an important pillar of trust. Yet it is most effective when it stands alongside other pillars of trust, such as banking supervision, resolution arrangements and ultimately the lender of last resort function of central banks. Current discussion on the establishment of a common deposit insurance scheme for the euro area - the European Deposit Insurance Scheme - provides an excellent opportunity to reassess the whole regulatory architecture. And the lessons from this reassessment are likely to be instructive beyond the euro area.
Effective regulation not only incorporates lessons from the past, but also adapts to structural changes in the financial system. Thus, looking ahead, deposit insurance needs to be reviewed continuously. Improvisation in the midst of a crisis can be a recipe for disaster.
Mr Carstens concludes with some observations on what these developments imply for policy. Clearly, deposit insurance design needs to learn from the past. Notable progress has been made since the crisis. In the euro area, the introduction of the EDIS could prove to be a catalyst for financial integration, by completing the banking union, and for enhancing the regime for dealing with weak banks. More generally, deposit insurers have assumed an active role in resolution, strengthening the post-crisis financial system.
Deposit insurance also needs to preserve its flexibility to account for the ongoing technological revolution in finance. As the line between banks and non-banks blurs, there is an increasing likelihood that a crisis of confidence in the fintech sector could spill over to the traditional banking sector. For instance, if deposits at bigtechs reach a critical mass, lost confidence in their liquidity could put pressure on the overall financial system and undermine trust in all deposits. The importance of deposit insurance thus remains as relevant as ever.
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