Does deposit insurance increase moral hazard in banks? The case of the Australian Financial Claim Scheme .

Deposit insurance schemes have been globally accepted as a means for promoting financial stability and protecting deposits. Australia’s deposit insurance scheme, the Financial Claims Scheme (FCS) which was introduced subsequent to the onset of the Global Financial Crisis, has been somewhat unique by international standards. wThe potential financial stability benefits provided by the FCS come at a cost. As well as the reduced level of market discipline of banks by retail depositors (from perceptions of safety), there is also an impact on demand for alternative investment products. Furthermore a deposit insurance scheme like this can prompt moral hazard behaviors by banks. The paper analyzes these issues.