THE NATIONAL DEPOSIT INSURANCE SYSTEM: A MARKET INSTITUTION AT THE CROSSROADS

The safety net provided by deposit insurance systems gain heavily in weight attimes of crisis. The correct set of such a cushion is critical to its effectiveness. While ithelps to prevent bank runs, the severe market distortions are of great concern. The shortterm benefit of public confidence can be, far and away, offset by its long run negative effectsconsisting mainly in increased moral hazard, heavy public costs and impaired competition.