In Australia the public assumes that the Reserve Bank will guarantee deposits in the primary banks. When the pyramid Building Society failed, ordinary depositors received a 90 cent in the dollar return which was funded by a State fuel levy. A simiar response could be assumed in the event of any second tier insitution failing.

It is grossly unfair to taxpayers in any country that the shareholders and executives of financial institutions privatise profits then socialise any losses.

Taxpayers (though the central bank) should receive a fee that represents the true risk of providing default insurance.

An alternative may be to let depositors purchase their own default insurance in full. The downside of this option would be the cost of the transaction fees. Those least able to withstand losses would would , in my view, be the least likely to purchase the coverage. An upside of this approach would be that the insurance on depositis in strong, diversified financial instituions would be much less than for deposits with the Northern Rocks of this world.

My guess is that a hybrid arrangement would work best with:

1) Central Banks insuring 65% of the value of deposits for a market based fee (based on a credit rating) ; and
2) Provision for depositors to purchase additional default insurance if they so wish.

Comments welcome.