Incentive compatibility and the optimal design of deposit protection schemes: An assessment of UK arrangements
Journal of Financial Regulation and Compliance
ISSN: 1358-1988
Article publication date: 1 June 2002
Abstract
Late in 2001, the Financial Services Authority (FSA) introduced a new set of arrangements for deposit protection in the UK. While the changes involve a welcome improvement on previous arrangements, much more could be done to enhance their overall cost‐effectiveness. This paper explains the flaws in previous and current arrangements and, using a relatively crude but nevertheless objective measure of the extent of their compliance with International Monetary Fund (IMF) best practice ‘rules’, compares their degree of ‘incentive‐compatibility’ (or economic efficiency ‐ ie the extent to which they minimise the problems created by adverse selection, moral hazard and principal/agency conflict) with the counterpart schemes operating elsewhere in the European Union and beyond. In this way, areas for future improvements are identified, which will ideally require accommodating changes in the guiding Deposit Guarantee Schemes Directive.
Keywords
Citation
Hall, M.J.B. (2002), "Incentive compatibility and the optimal design of deposit protection schemes: An assessment of UK arrangements", Journal of Financial Regulation and Compliance, Vol. 10 No. 2, pp. 115-134. https://doi.org/10.1108/13581980210810157
Publisher
:MCB UP Ltd
Copyright © 2002, MCB UP Limited