Deposit insurance

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Explicit deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of a financial system safety net that promotes financial stability.

The Bank of International Settlements has published a study,"Core Principles for Effective Deposit Insurance Systems" in June, 2009.

Contents

Why it is needed

Banks are allowed (and in most places, encouraged) to lend or invest most of the money deposited with them instead of safe-keeping the full amounts (fractional-reserve banking). If many of a bank's borrowers fail to repay their loans when due, the bank's debtors, including its depositors, risk loss. Because banks rely on customer deposits that can be withdrawn on little or no notice, banks are prone to a "run" on a bank, where depositors seek to withdraw funds quickly ahead of a possible bank insolvency. Because banking institution failures have the potential to trigger a broad spectrum of harmful events, including economic recessions, policy makers maintain deposit insurance schemes to protect depositors and to give them comfort that their funds are not at risk.

Many national deposit insurers are members of the International Association of Deposit Insurers (IADI), an international organization established to contribute to the stability of financial systems by promoting international cooperation and to encourage wide international contact among deposit insurers and other interested parties, in particular, IADI.

Detractors of deposit insurance claim the schemes introduce a moral hazard issue, encouraging both depositors and banks to take on excessive risks.[1]

How it works

Deposit insurance institutions are for the most part government run or established, and may or may not be a part of a country’s central bank, while some are private entities with government backing or completely private entities.

There are a number of countries with more than one deposit insurance system in operation (e.g. Austria, Canada (Ontario & Quebec), Germany, Italy and the United States.

On the other hand, one deposit insurance system can cover more than one country: the Marshall Islands, Micronesia, and Puerto Rico are insured by the US Federal Deposit Insurance Corporation.

Cameroon, the Central African Republic, Chad, Democratic Republic of the Congo, Equatorial Guinea and Gabon will be covered also by a single system.

Overview by country

According to IADI, as of June 2008, there are currently 119 countries with a deposit insurance system in operation, pending, planned or under serious study (i.e. 99 in operation, 8 pending, 12 planned or under serious study).

North America

United States

The United States was the first country to establish an official deposit insurance scheme, the Federal Deposit Insurance Corporation, during a Great Depression banking crisis in 1933.

A separate fund, the National Credit Union Share Insurance Fund (NCUSIF) administered by the National Credit Union Administration (NCUA), was created in 1970 to insure deposits at credit unions.

Canada

Canada created its own Deposit Insurance Corporation in 1967. It is similar to the Federal Deposit Insurance Corporation in the United States.

Since 1967, 43 financial institutions have failed in Canada and all were members of CDIC. There have been no failures since 1996. Information on the Canadian system is found at http://www.cdic.ca.

Insurance is restricted to registered member institutions, and covers only the first Canadian dollar$ 100,000 in very specific categories of accounts. Credit unions and Quebec’s caisse populaire system are not insured Federally, because they are created under Provincial charters and backed by Provincial insurance plans, which generally follow the Federal model.

Funds in a foreign currency, not Canadian dollars, are not insured, such as a US dollar accounts even when held in a registered CDIC financial institutions. Guaranteed Investment Contract (GICs) with a longer term than 5 years are also not insured. Funds in foreign banks operating in Canada may or may nor be covered depending on whether they are members of CDIC [2]. Some funds in the Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) at their bank may not covered if they are invested in mutual funds or held in specific instruments like debentures issued by government or corporations. The general principle is to cover reasonable deposits and savings, but not deposits deliberately positioned to take risks for gain, such as mutual funds or stocks.

The roots of all of this well organized reform can be traced back to the 19th century, such as the Upper Canada’s financial problems of 1866, the North American panic of 1872 and the 1923 failure of Toronto’s Home Bank, symbolized today by Casa Loma. Historically in Canada regional risk has always been spread nationally within each large bank, unlike the uneven geography of US unit banking. layered with savings & loans of regional or national size, who in turn disperse their risk through investors. Generally speaking, the Canadian banking system is well regulated, in part by the little known Inspector of Financial Institutions, who can in an extreme case close a financial institution. That, plus Canada’s tight mortgage rules, mean the risk of bank failures similar to the US are slim, but not impossible.

Mexico

Mexico’s Banking Act of 1897 established the legal possibility of failure of a credit institution, but set up some mechanisms in the banking law itself to prevent bank failures -- but the law itself did not create a formal insurance scheme. In 1981 the General Law of Credit Institutions and Auxiliary Organizations provided for the creation of a fund to protect credit obligations assumed by banks.

Caribbean & South America

European Union

Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes[3] requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euro per person. On October 7, 2008, the Ecofin meeting of EU's ministers of finance agreed to increase the minimum amount to 50,000.[4].

Timelines and details on procedures for the implementation, which is likely to be a national matter for the member states, was not immediately available.

The increased amount followed on Ireland's move, in September 2008, to increase its deposit insurance to an unlimited amount. Many other EU countries, starting with the United Kingdom, reacted by increasing its limit to avoid that people transfer savings to Irish banks.

By EU country

As from October 2008, many EU countries were in the process of increasing the amounts covered by their despoit insurance schemes. Since these amounts are typically encoded in legislation, there was a certain delay before the new amounts were formally valid. Countries have varied in their approach; some have permanently increased the amount, while other have implemented temporary measures.

Country Savings limit Coverage Valid since Comments and previous amounts
Belgium EUR 40,000 (*) 100% Divided into initial compensation of up to 20,000 euro and additional compensation of up to 20,000 euro.[5]
Denmark Danish krone 300,000 + unlimited 100% Unlimited from October 5, 2008 The coverage of the sector's trust fund Garantifonden for Indskydere og Investorer remains at DKK 300,000. For the two year period from October 5, 2008 to September 30, 2010 an unlimited governmental guarantee for deposits in excess of that amount has been added.[6] [7]
Finland EUR 50,000 100% 1998 Increased from EUR 25,000 on October 8, 2008.[8]. The increased amount is valid until December 31, 2009.
France EUR 70,000 100% Fonds des garantie des depôts: FAQ
Germany EUR 20,000 (*) 90% October 2008 Additional voluntary guarantee schemes run by different banking associations (private banks, cooperative banks, savings banks). An unlimited state guarantee was announced in October 2008, if one of those schemes failed. The legal details are nevertheless unclear.BBC Business Editor's blog
Greece EUR 100,000 October 2008 Was 20,000 EUR, increased in October 2008
Ireland Unlimited September 2008 Amount raised to unlimited in September 2008
Italy EUR 103,291.38 100% December 4, 1996 Fondo Interbancario di Tutela dei Depositi: Deposit Guarantee
Netherlands EUR 40,000 (*) 100% of first EUR 20,000, 90% of next EUR 20,000 (hence a compensation of up to EUR 38,000) Temporarily until October 2009: 100% of first EUR 100,000.Deposit guarantee scheme
Poland EUR 50,000 (Polish złoty 175,000) 100% October 2008 Amount raised from EUR 22,500 in October 2008
Portugal EUR 100,000 100% November 2008 Amount raised from EUR 25,000 to EUR 100,000 in November 2008.Fundo de Garantia de Depósitos: Deposit Guarantee Fund
Spain EUR 20,000 (*) 100% 1998 Fondos de Garantía de Depósitos: Money Deposits Guaranteed
Sweden Swedish krona 500,000 100% October 6, 2008 From 1996 to October 2008, amount was SEK 250,000. National Debt Office, October 6, 2008: Expanded deposit insurance
United Kingdom Pound sterling 50,000 100% October 7, 2008 Amount raised from 35,000 to GBP 50,000 effective October 7, 2008. Before October 1, 2007 coverage was 100% of the first GBP 2,000 and 90% between 2,000 and GBP 35,000.Financial Services Compensation Scheme: Deposit claims FAQs

Footnote: (*) Those countries which have a deposit insurance of less than EUR 50,000 are expected to increase the amount following an October 7, 2008 meeting of the Ecofin.

Rest of Europe

Iceland

Deposit insurance in Iceland is handled by Depositors' and Investors' Guarantee Fund (Tryggingarsjóður) and covers a minimum of 20 887 euros. Depositors’ and Investors’ Guarantee Fund

Norway

Deposit insurance in Norway is handled by the Norwegian Banks' Guarantee Fund (Bankenes sikringsfond) and covers deposits up to 2 million norsk krone. The Norwegian Banks' Guarantee Fund,

Russia

Russia enacted deposit insurance law in December 2003 and established the national Deposit Insurance Agency of Russia (DIA) in 2004.

Federal law on insurance of housenhold deposits in banks of the Russian Federation, full text

Deposit insurance agency, [9]

Until 2004, Russian banking system was divided: obligations of state-owned Sberbank were guaranteed by law, while other banks were not insured in any way, creating an unfair advantage for Sberbank. [10]

The law addresses only individuals' deposits. Maximum compensation is limited at 400,000 roubles (equivalent to 16 thousand US dollars or 11 thousand Euro at July 2008 exchange rate); amounts up to 100,000 roubles are repaid at face value, the balance at 10% discount.

As at January 2008, DIA funds exceeded 68 billion roubles (2.8 billion US dollars). There were 15 "insured events" (bankruptcy cases involving DIA intervention) in 2007 with resulting payout reaching 350 million roubles. Results of DIA Activities in 2007 and DIS Development Issues [11].

The agency is set up as a state-owned corporation, managed jointly by Central Bank and the government of Russia. DIA membership is mandatory requirement for any bank operating with private investors' money. Central Bank of Russia used admission of banks into DIA system to weed out unsound banks and money launderers. The murder of Andrey Kozlov, the Central Bank executive in charge of DIA admission, was directly linked to his non-compromising attitude to money launderers.[12]

Switzerland

Switzerland has a privately operated deposit insurance system called Deposit Protection of Swiss Banks and Securities Dealers"Deposit Protection of Swiss Banks and Securities Dealers".

It guarantees up to CHF 100'000 per bank customer per bank. Membership is compulsory for all banks and securities dealers who are regulated by the Swiss Financial Market Supervisory Authority "FINMA". See the list of members of the Deposit Protection of Swiss Banks and Securities dealers[13]

It had covered depositors in 1993 in the case of the failure of Spar-und Leihkasse Thun SLT, Thun.

The next cases happened in 2007 with the liquidation of AB FIN SA (a securities dealer) in Lugano and with Kauphting (Luxembourg) SA, Geneva branch which was closed on October 9, 2008. Clients of this bank received the payments (at the time up to CHF 30'000 per customer) within 3 weeks.

For further information see the FAQ.

British Isles Offshore

Although many offshore subsidiaries of mostly British-based banks and building societies in the Isle of Man, Jersey and Guernsey offer a parental guarantee for all sums deposited with them, the Crown Dependencies fall outside the jurisdiction of both the United Kingdom's Financial Services Authority guarantee to underwrite the first £50,000 per depositor per bank and the European Economic Area 'passport scheme' that pays a minimum of £16,000 per depositor per bank in the case of a default. In 1991, the Isle of Man introduced a bank depositors' insurance scheme to cover 75 percent of the first £15,000 per depositor per bank, but it was the October 2008 crisis-stricken Icelandic government's seizure of Kaupthing Bank hf in Iceland after the United Kingdom suspended the trading licence of Kaupthing's British subsidiary that compelled a radical revision of deposit insurance in the Isle of Man. Unable to secure reserves held by Kaupthing hf in Iceland or Kaupthing's British subsidiary to facilitate customer withdrawals, Kaupthing Singer and Friedlander (Isle of Man) Ltd. saw its Isle of Man banking licence suspended after operating less than a year, compelling the firm to request to be wound up. The Isle of Man government called an emergency session of the Tynwald parliament which voted unanimously to bring the Isle of Man depositors' compensation scheme into line with the newly-enlarged scheme in the United Kingdom, guaranteeing with immediate effect 100 percent of the first £50,000 per depositor per bank, and studying amendments for the subsequent inclusion within the scheme of corporate and charitable accounts. The Isle of Man government also pressed the Icelandic government to honour Kaupthing hf's irrevocable and binding guarantee of all depositors' funds held by Kaupthing, Singer and Friedlander (Isle of Man) Ltd. In Jersey and Guernsey, deposit insurance schemes for non-residents have yet to be enacted.[1]

Australia & New Zealand

The Financial Claims Scheme was established in October 2008. Its purpose is to protect depositors of authorised deposit-taking institutions (banks, building societies and credit unions) and policyholders of general insurers from potential loss due to the failure of these institutions.

For ADIs, the scheme provides protections to depositors up to the limit of the scheme and seeks to provide depositors with timely access to their deposits in the event of the failure of their authorised deposit-taking institution.

For general insurers, the scheme provides compensation to eligible policyholders with valid claims against a failed general insurer.

APRA is responsible for the administration of the Financial Claims Scheme.

Further information regarding the operation of the Financial Claims Scheme, as it applies to authorised deposit-taking institutions and general insurers, is available in the “Frequently Asked Questions” documents at the links below:


The Australian Prime Minister announced on October 12, 2008 that, in response to the economic crisis of 2008, 100% of all deposits would be protected over the subsequent three year period. This measure comes on top of existing mandates of APRA and ASIC to monitor Australian banks and deposit taking authorities to ensure that their risks do not compromise the safety of depositors funds.

Today the Rudd Government is announcing the withdrawal of its Guarantee Scheme for Large Deposits and Wholesale Funding (the Guarantee) on 31 March 2010, acting on the advice of the Council of Financial Regulators (the Council).

Today's announcement does not affect the Financial Claims Scheme, which will continue giving over 16 million Australians certainty over their deposits of up to $1 million until the cap is reviewed in October 2011.

The Guarantee has been vital to the stability of our financial system when others were collapsing across the globe, leading to the first contraction in the global economy since World War II.

It gave our banks continued access to global capital markets on competitive terms, which has been critical in supporting the flow of credit through the Australian economy.

Australian banks and other lenders have so far paid around $1.1 billion for the use of the Guarantee and will pay around $5.5 billion over its full life.

Without the Guarantee, our banks would have lent less and interest rates for borrowers would have been higher, leading to lower growth and higher unemployment.

The Guarantee has also been vital in helping to support competition in the banking sector throughout the global financial crisis which hit smaller lenders particularly hard.

It has offered wholesale funding certainty to more than 150 Australian Authorised Deposit-taking Institutions, including regional banks, building societies and credit unions.

The Guarantee has allowed non-major Australian banks to raise over $32 billion in funding from international credit markets.

Together with the Government's direct investment of up to $16 billion in the RMBS market, this has helped smaller lenders to continue lending at competitive interest rates and competing with the big banks.

The Guarantee was first announced on 12 October 2008 in the face of severe dislocation on global credit markets which forced most G20 member countries to introduce some form of funding guarantee.

While our banks are highly-rated, well-capitalised and did not engage in the risky lending seen in some other countries – they still compete in global credit markets for funding against other borrowers all around the world.

The Australian Government acted quickly and decisively to ensure our banks stayed on a level playing field.

The Council – consisting of the heads of the Reserve Bank, Treasury, ASIC and APRA - has advised that bank funding conditions have improved such that the Guarantee is no longer needed, and that no Australian institution will need the Guarantee to fund themselves.

Importantly, our regulators explicitly advise that removing the Guarantee will not materially affect banking sector funding costs.

The Council also advises that it is appropriate we withdraw our Guarantee due to the greater strength of our financial system compared to key G20 countries which have already removed their guarantee or will do so shortly.

Existing guaranteed liabilities of authorised deposit-taking institutions (ADIs) will continue to be covered by the Guarantee to maturity for wholesale funding and term deposits, or to October 2015 for at call deposits. The final date for ADIs to apply for access to the Guarantee is 24 March 2010.

The Guarantee will cease to have effect from 5pm on 31 March 2010.

Today, the Government is also announcing the closure of the Guarantee of State and Territory Borrowing (State Guarantee) which has been critical to maintaining the capacity of state and territory governments to deliver on vital nation building investments.

The Government's announcement of the State Guarantee led to a sharp improvement in the pricing of state bonds relative to Commonwealth bonds and restored demand for state government bonds.

These benefits were experienced by all states, regardless of whether they opted to make explicit use of the guarantee.

The Government will close the State Guarantee to new issuance on 31 December 2010. The longer withdrawal period relative to the Guarantee of Large Deposits and Wholesale Funding is needed for states to establish liquidity in new unguaranteed bond lines.

Issuing bonds under existing lines is a critical source of funding for the states, so all states and territories will continue have access to the guarantee until the end of this year.

Existing guaranteed bonds will continue to be covered until either they mature or are bought back and extinguished by the issuer.

Today's announcement marks a further milestone in our recovery from the worst global recession in 75 years and continues the Rudd Government's record of responsible economic management.


New Zealand has announced on October 12, 2008, that an opt-in scheme for retail deposits will be introduced.[14] First NZ$5billion free, excess amounts charged at 10 basis point pa.

Asia

India

India was the second country in the world to introduce Deposit Insurance in 1962. The Deposit Insurance Corporation commenced functioning on January 1, 1962 under the aegis of the Reserve Bank of India (RBI). 1971 witnessed the establishment of another institution, the Credit Guarantee Corporation of India Ltd. (CGCI). In 1978, the DIC and the CGCI were merged to form the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Hong Kong

  • Deposit Protection Scheme

Hong Kong Deposit Protection Board, which is an independent and statutory institution formed to manage and supervise the operation of Deposit Protection Scheme. The maximum protection amount of deposit is HKD$100,000.

Economic impact

When a nation state has a deposit insurance scheme, foreign investors (aka non-resident bank depositors) are more likely to passively deposit larger amounts of money in the banks of said nation state (that has a bank deposit insurance scheme).

Having a bank deposit insurance scheme (for all practical purposes) guarantees that a nation state will more likely have a higher rate of passive foreign investment (within the margin of insurable amount).

Passive foreign investment in a nation state’s finance system allows for more lending to be made when global finance system conditions constrict the amount of lendable money. There has been substantial research done over the years on the impact on foreign investment of bank deposit insurance schemes.

Deposit insurance organizations and programmes

These are the Crown or State run deposit insurance corporations

  • Federal Deposit Insurance Corporation (FDIC) (USA)
  • National Credit Union Share Insurance Fund (part of NCUA) (USA)
  • American Share Insurance (ASI) (USA, private)
  • Canada Deposit Insurance Corporation (CDIC) (Canada)
  • Financial Services Compensation Scheme (United Kingdom)
  • Deposit Insurance Agency (DIA) (Russia)
  • Instituto para la Protección al Ahorro Bancario (IPAB) (Mexico)
  • Philippine Deposit Insurance Corporation (PDIC) (Philippines)
  • Bulgarian Deposit Insurance Fund (BDIF) (Bulgaria)
  • Korea Deposit Insurance Corporation (KDIC) (Korea)
  • Fonds de Garantie des Depôts (FDG) (France)
  • Malaysia Deposit Insurance Corporation (MDIC) (Malaysia)
  • Depositors' Compensation Scheme (Isle of Man)
  • Deposit Insurance and Credit Guarantee Corporation (DICGC) (India)

Research and guidance papers on deposit insurance

Related research papers

Sovereign deposit insurance links

International
Africa
Americas
Asia
Europe
Others

References

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