A well - established deposit insurance system is one of the infrastructure conditions for the banking industry to develop an efficient governing and monitoring mechanism. Facing the increasing moral hazards in the industry, the deposit insurance regime has become a frequently disputed issue in terms of its financial supervision aspect. To understand the pros and cons of the deposit insurance system, author makes an institution based comparative analysis under a logical reference framework. The comparisons, between the government deposit insurance system and the depositor's informal insurance contract, have shown that the former claims a lower cost, though aiming at the same target, indicating an apparent competitive edge. The formal deposit insurance system, therefore, has its reason to be a substitute to the informal insurance contract. This is important for China, who features an open and transitional financial system.