Stephen Cecchetti

In the aftermath of the 2007–9 global financial crisis, the global standard setting process evolved into a comprehensive policy development cycle with collaboration across various international organizations. The Financial Stability Board (FSB) and the Standard Setting Bodies (SSBs) have responsibility for identifying needs for additional regulation or further harmonization; proposing, assessing, and agreeing on standards; implementing rules; and evaluating impact prior to proposing refinements. The International Monetary Fund (IMF) contributes to the analysis through its participation in the various organizations and bringing its analytical capacities to bear on a variety of macro-financial questions, and providing an independent voice.

The job of central bankers is to use the monetary powers granted to them to promote price stability, sustainable growth, and a stable financial system. They do this in an environment fraught with unavoidable uncertainties. But, in conducting policy, there is one uncertainty that policymakers can and should reduce: the uncertainty they themselves create. Everyone agrees that monetary policymakers should do their best to minimize the noise that their actions add to the environment. When policy is transparent and effective, people in the economy and financial markets respond to the data, not to the policymakers.

The purpose of deposit insurance is to ensure financial stability, as well as protect the interests of small investors. But with government guarantees in hand, bankers take excessive risks, driving up the chances of failure. Evidence suggests that these schemes increase rather than decrease the probability of financial crises. There is a good chance that deposit insurance does more harm than good. This article surveys the rationale for and history of deposit insurance, and discusses its consequences and possible alternatives.