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I show how the bank run occurred with the liquidity insurance model of Diamond and Dybvig (1983). According to this model bank run occurs due to self fulfilling behaviour of the depositors. I relate the run on the Northern Rock bank to this model, I extended the model by showing that information on the bank is initial cause of the bank run. In other words the run on Northern rock bank was not only speculative but it also had a fundamental origin. I analysed the effectiveness of deposit insurance, which according to the model is very effective solution in preventing the bank runs.

FSCS until September 2007 used co-insurance system to protect depositors. Co-insurance system do not provide 100% protection to the depositors, it involves the depositors to take part in the risk of loss. This system is employed to reduce the moral hazards. In other words this system gives incentive for the depositors to monitor on the banks activity. I study the role played by deposit insurance system during Northern Rock crisis. The system failed to protect the majority of depositors and it also did not play its role in preventing the bank run. Professor Willem Buiter commented on the deposit insurance arrangement in the UK during the crisis as a shambles (House of Commons, fifth report of session 2007-2008). My study show the co-insurance system will be very risky at the time of bank crisis. I have argued against the co insurance model with the experience of Northern rock crisis, this system did not work effectively because it was very difficult for the consumers to understand the concept. Furthermore expecting the consumers to judge the funding risks of the banks is unrealistic.

The Northern Rock crisis shows that the consumer understanding and the awareness about the deposit insurance system play an important role in preventing the bank run. As there are many recent designs and new measures to prevent bank runs and reduce moral hazards, we show they must account for a fundamental aspect, as a complex insurance system will be very difficult for the public to understand and will fail to create confidence. I discuss a correct level of compensation limit that UK must have to protect majority of depositors in UK with a statistical data and gross domestic per capita income of the country. I analyse the corrective measures in the insurance arrangement for UK, aimed at improving the financial stability.

It is a tight rope act. On one hand it can reduce the indices of bank run or even stop it all together. On the other hand, when not done carefully it can fuel crises (Patricia A. McCoy). I will give out the rationales for the deposit insurance system and also discuss the moral hazards it creates. Many economists have admitted that the deposit insurance system will give r本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。