Depository Insurance Funds
Depository insurance systems have been increasing rapidly in the developing world. However, this does not imply that establishing and operating an effective and efficient depository fund system involves straight forward tasks. In fact, they may create some problems as illustrated by FDIC and other depository funds. The problem created by the FDIC or any other depository insurance is the deregulation of finance. In addition, it creates high risks to loan associations that are protected by other agencies. Depository insurance makes interests rates become volatile and cuts premiums for banks that are considered to be well capitalized. The FDCI led to a decline in the net assets to a negative especially during the 2009 financial crisis as the institution was underwater. It creates failure of foresight although it may succeed in cutting off panics and suppresses efficient withdrawals while inducing excessive risk taking.
The association between risk and return is an essential relation, which affects anticipated rates of return on every investment. This characteristic is featured as being direct or positive in that if higher levels of risk related to a particular asset investment are expected, then higher returns are needed to compensate for the anticipated higher risk. On the other hand, if an asset investment has moderately lower levels of risk then investors are likely to get satisfied with lower returns. This relationship holds for business managers and individual investors. As returns on investments represent the level of risk engaged with the investment, then investors need to be able to establish returns appropriate for A specified degree of risk. Therefore, measuring the risk is essential before making any investments. This relationship can be used to explain why there have been depository fund failures along with bailouts in the past decades. As mentioned, measuring the risk involved in an investment is essential before the real investment is carried on. This is something that was not considered by investors during the earlier times, therefore, leading to failures and bailouts of depository funds. After assessing the risk, the price is set for determining the returns to be expected by investors. There are ways through which the depository funds would remain solvent. One of these ways is through mergers between them to strengthen the funds. Another policy is assessing the risk and return relationship to decide on whether or not to invest. Additionally, there should be assurance of financing from banks and governments and carelessness and laxity management on both the depositor and the banker should be eradicated if the desired objective is to be achieved. These would help the depository funds to remain solvent. Again, this would ensure stability in the financial sector not only on FDIC, but also of other significant depository funds and change the negativities associated with failures of depository funds.
Whether insurance funds benefit or harm a country, depends on how well it is administered and designed. The problems created by FDIC have made many to believe that an alternative to this depository fund is to not have any. This would have significant effects on the nation’s banking sector and the economy as a whole. This is well explained using the surplus and deficit units in finance. Lack of the systems implies that there are inefficient withdrawals and bank runs predicated on coordination failures. Additionally, it will be difficult for the country to establish equilibrium between surplus and deficit units. Surplus units refer to businesses, individuals, or governments who have unspent funds and are willing to lend. On the other hand, deficit units refer to these stakeholders interested in borrowing funds as they have spending plans that exceed their levels of incomes. This has a negative implication on the country’s overall economy. Without depository funds, customers would be worried that banking institutions might fail and, therefore, take up their money.
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