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Deposit insurance in India: Why risk-based pricing model must be introduced | The Financial Express

The global financial crisis underscored the importance of having a robust deposit insurance system (DIS) for the banking system across the world. A 2014 IMF paper estimated that nearly 112 countries (59% of 189 countries covered in the study) had a DIS. It was in 2008, that Australia and New Zealand introduced guarantees for the first time, whereas a significant majority of other countries increased their insurance coverage.

Three issues in the DIS merit special attention. First, DIS is asymmetric in nature, with 84% of high income countries having a system in place. In contrast, explicit deposit insurance is less widespread among low income countries, at about 32% of countries (India included). Second, by and large the DIS has fulfilled its primary objective of preventing open runs on bank deposit during and after large shocks to the global financial system. Third, the DIS, though largely effective in preventing large-scale depositor runs, has not priced the risk correctly. Interestingly, there are analytical papers by Viral Acharya on this issue of pricing deposit insurance premiums.

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Deposit insurance in India: Why risk-based pricing model must be introduced – The Financial Express.

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