Q.20 Many policymakers in developing ... [FREE SOLUTION]

Chapter 8: Q.20 (page 236)

Many policymakers in developing countries have proposed the implementation of a system of deposit insurance similar to the system that exists in the United States. Explain why this might create more problems than solutions in the financial system of a developing country.

Short Answer

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Because developing and developed countries have different financial systems, implementing a deposit insurance system similar to the United States in a developing country may cause more problems than solutions in the financial system.

Step by step solution

Content Introduction

Asymmetric information refers to incomplete information between two parties, so if there is any difference in information provided to people other than the truth, this is referred to as asymmetric information.

Content Explanation

There are many policies influencing people who have proposed the idea that in developing countries such as India, there should be deposit insurance. Similar policies also exist in the United States. But this idea may not be beneficial because, the financial structure, is different from one country to another. And hence the same economic strategies that may work in the United States might not work in India.

Deposit insurance is an aspect of the safety net, it cannot solve the problem of a weak financial system faced by developing countries. Successful working of deposit insurance requires certain conditions such as macroeconomic stability. strong legal framework, health banking system, etc. Developing countries often lack these conditions.