Deposit insurance
Encyclopedia
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
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
system safety net
Safety net
A safety net is in most cases a net to protect people from injury after falling by limiting the distance they fall. It may also be a device to arrest falling or flying objects for the safety of people beyond the net....
that promotes financial stability.
Why it exists
Banks are allowed (and usually encouraged) to lend or invest most of the money deposited with them instead of safe-keeping the full amounts (see fractional-reserve bankingFractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
). If many of a bank's borrowers fail to repay their loans when due, the bank's creditors, 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 Because banks rely on customer deposits that can be withdrawn on little or no notice, banks are prone to a Bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
, 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.
Deposit insurance was formed to protect small unit banks in the United States when branching regulations existed. Banks were restricted by location thus did not reap the benefits coming from economies of scale, namely pooling and netting. To protect local banks in poorer states, the Federal government created deposit insurance.
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
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
, encouraging both depositors and banks to take on excessive risks. Without deposit insurance, banks would compete for deposits because depositors would prefer safe banks over risky banks to guard their money. With deposit insurance, banks can take excessive risks because depositors do not fear for their deposits safety and thus do not move their money to safer banks. The risks are shared by all banks, be they safe or risky.
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 bankCentral bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
, 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 including Austria
Austria
Austria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
, Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
(Ontario
Ontario
Ontario is a province of Canada, located in east-central Canada. It is Canada's most populous province and second largest in total area. It is home to the nation's most populous city, Toronto, and the nation's capital, Ottawa....
& Quebec
Quebec
Quebec or is a province in east-central Canada. It is the only Canadian province with a predominantly French-speaking population and the only one whose sole official language is French at the provincial level....
), Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, and the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
On the other hand, one deposit insurance system can cover more than one country: the Marshall Islands
Marshall Islands
The Republic of the Marshall Islands , , is a Micronesian nation of atolls and islands in the middle of the Pacific Ocean, just west of the International Date Line and just north of the Equator. As of July 2011 the population was 67,182...
, the Federated States of Micronesia
Federated States of Micronesia
The Federated States of Micronesia or FSM is an independent, sovereign island nation, made up of four states from west to east: Yap, Chuuk, Pohnpei and Kosrae. It comprises approximately 607 islands with c...
, and Puerto Rico
Puerto Rico
Puerto Rico , officially the Commonwealth of Puerto Rico , is an unincorporated territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the United States Virgin Islands and the British Virgin Islands.Puerto Rico comprises an...
are insured by the US Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
.
Cameroon
Cameroon
Cameroon, officially the Republic of Cameroon , is a country in west Central Africa. It is bordered by Nigeria to the west; Chad to the northeast; the Central African Republic to the east; and Equatorial Guinea, Gabon, and the Republic of the Congo to the south. Cameroon's coastline lies on the...
, the Central African Republic
Central African Republic
The Central African Republic , is a landlocked country in Central Africa. It borders Chad in the north, Sudan in the north east, South Sudan in the east, the Democratic Republic of the Congo and the Republic of the Congo in the south, and Cameroon in the west. The CAR covers a land area of about ,...
, Chad
Chad
Chad , officially known as the Republic of Chad, is a landlocked country in Central Africa. It is bordered by Libya to the north, Sudan to the east, the Central African Republic to the south, Cameroon and Nigeria to the southwest, and Niger to the west...
, Congo
Democratic Republic of the Congo
The Democratic Republic of the Congo is a state located in Central Africa. It is the second largest country in Africa by area and the eleventh largest in the world...
, Equatorial Guinea
Equatorial Guinea
Equatorial Guinea, officially the Republic of Equatorial Guinea where the capital Malabo is situated.Annobón is the southernmost island of Equatorial Guinea and is situated just south of the equator. Bioko island is the northernmost point of Equatorial Guinea. Between the two islands and to the...
, and Gabon
Gabon
Gabon , officially the Gabonese Republic is a state in west central Africa sharing borders with Equatorial Guinea to the northwest, Cameroon to the north, and with the Republic of the Congo curving around the east and south. The Gulf of Guinea, an arm of the Atlantic Ocean is to the west...
will also be covered 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).United States
The United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
was the first country to establish an official deposit insurance scheme, the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
, during a Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
banking crisis in 1933.
A separate fund, the National Credit Union Share Insurance Fund
National Credit Union Share Insurance Fund
The National Credit Union Share Insurance Fund is administered by the National Credit Union Administration for the purpose of providing deposit insurance to protect deposits of credit union members at insured institutions in the United States. It was created in 1970 shortly after the creation of...
(NCUSIF) administered by the National Credit Union Administration
National Credit Union Administration
The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...
(NCUA), was created in 1970 to insure deposits at credit unions
Credit unions in the United States
Credit unions in the United States served 89 million members as of 2008, comprising 43.7% of the economically active population. U.S. credit unions are not-for-profit, cooperative, tax-exempt organizations....
.
In Massachusetts, the Depositors Insurance Fund (DIF) insures deposits in excess of the FDIC limits at state-chartered savings banks.
Canada
Canada created the Canada Deposit Insurance CorporationCanada Deposit Insurance Corporation
-External links:*** Official CDIC site*...
(CDIC) in 1967. It is similar to the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
in the United States. Since 1967, 43 financial institutions have failed in Canada and all were members of CDIC. There have been no failures since 1996. Information on the Canadian system is found at http://www.cdic.ca. Insurance is restricted to registered member institutions, and covers only the first C$
Canadian dollar
The Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
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
Guaranteed Investment Contract
A guaranteed investment contract is a contract that guarantees repayment of principal and a fixed or floating interest rate for a predetermined period of time. Guaranteed investment contracts are typically issued by life insurance companies and marketed to institutions qualified for favorable tax...
s with a longer term than 5 years are also not insured. Funds in foreign banks operating in Canada may or may not be covered depending on whether they are members of CDIC. Some funds in the Registered Retirement Savings Plan
Registered Retirement Savings Plan
A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act...
or Registered Retirement Income Fund
Registered Retirement Income Fund
A Registered Retirement Income Fund or RRIF is a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan...
at their bank may not be 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, which in turn disperse their risk through investors. Generally speaking, the Canadian banking system is well regulated, in part by the little known Office of the Superintendent of Financial Institutions (Canada), which can in an extreme case close a financial institution. That and Canada's tight mortgage rules mean the risk of bank failures similar to the US are much less likely.
Mexico
MexicoMexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
’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.
European Union
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euroEuro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
per person. On October 7, 2008, the Ecofin meeting of EU's ministers of finance agreed to increase the minimum amount to 50,000. 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
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
's move, in September 2008, to increase its deposit insurance to an unlimited amount. Many other EU countries, starting with the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, 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. http://www.efdi.net/participantsDetails.asp?IdParticipants=1&Category=members| Country | Savings limit | Coverage | Valid since | Deposit insurance organization | Comments and previous amounts |
|---|---|---|---|---|---|
| Belgium Belgium Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many... |
EUR 100,000 (*) | 100% | Fonds de Protection / Beschermings Fonds / Protection Fund | Previously 20.000 EUR before 2009. | |
| Bulgaria Bulgaria Bulgaria , officially the Republic of Bulgaria , is a parliamentary democracy within a unitary constitutional republic in Southeast Europe. The country borders Romania to the north, Serbia and Macedonia to the west, Greece and Turkey to the south, as well as the Black Sea to the east... |
EUR 100,000 | 100% | December 31, 2010 | Bulgarian Deposit Insurance Fund DIF | Saving limit was EUR 51,129 in the period: April 15, 1998 - December 31, 2010 |
| Czech Republic Czech Republic The Czech Republic is a landlocked country in Central Europe. The country is bordered by Poland to the northeast, Slovakia to the east, Austria to the south, and Germany to the west and northwest.... |
EUR 100,000 | 100% | Deposit Insurance Fund | Previously (since 2002), the insured amount was 90 % of deposits up to EUR 25,000; in 2008 it was increased to 100% of deposits up to EUR 50,000. Effective 2011, the limit was increased to EUR 100,000. Credit unions covered since 2006. | |
| Denmark Denmark Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark... |
Ordinary deposit guarantee scheme applies after September 30, 2010, covers up to DKK Danish krone The krone is the official currency of the Kingdom of Denmark consisting of Denmark, the Faroe Islands and Greenland. It is subdivided into 100 øre... 750,000 |
100% | Garantifonden for indskydere og investorer, The Guarantee Fund for Depositors and Investors | http://www.indskydergarantifonden.dk For the two year period from October 5, 2008 to September 30, 2010 an unlimited governmental guarantee for deposits has been added. |
|
| Finland Finland Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside... |
EUR 100,000 | 100% | 1998 | Deposit Guarantee Fund | Increased from EUR 25,000 to EUR 50,000 on October 8, 2008 and to EUR 100,000 on January 1, 2011. |
| France France The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France... |
EUR 100,000 | 100% | Fonds de Garantie des Dépôts Fonds de Garantie des Depôts The Fonds de Garantie des Dépôts is a French deposit insurance fund. It was established on June 25, 1999 and guarantees deposits up to €70,000.... (FDG) |
Unlimited state guarantee? Following the Irish legislative change to unlimited state guarantee, and the German announcement of unlimited support, the French President declared on 13 October 2008 that "The government will not let any French bank fail", in a speech that was posted on the official website www.gouvernement.fr. This political commitment has so far held (rescue of the Franco-Belgian bank DEXIA) |
|
| Germany Germany Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate... |
EUR 100,000 | 100% | Jan 01, 2011 |
|
The 4 banking associations (see previous column) run voluntary additional guarantee schemes, which go beyond the European minimum of EUR 100,000. For instance for BdB member banks, "The protection ceiling for each creditor is 30% of the liable capital of the Bank..." An unlimited state guarantee was announced in October 2008 (and extended in July 2009). The legal details are nevertheless unclear. "It is a political declaration" said Torsten Albig. |
| Greece Greece Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe.... |
EUR 100,000 | 100% | October 2008 | Was 20,000 EUR, increased in October 2008 | |
| Hungary Hungary Hungary , officially the Republic of Hungary , is a landlocked country in Central Europe. It is situated in the Carpathian Basin and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest and Austria to the west. The... |
National Deposit Insurance Fund (NDIF) | ||||
| Ireland Ireland Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth... |
Unlimited | September 2008 | Central Bank and Financial Services Authority of Ireland Central Bank and Financial Services Authority of Ireland The Central Bank of Ireland is the financial services regulator of Ireland and historically the central bank. The bank was the issuer of Irish pound banknotes and coinage until the introduction of the euro currency, and now provides this service for the European Central Bank.The bank was founded... |
Amount raised to unlimited in September 2008 | |
| Italy Italy Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and... |
EUR 100,000 | 100% | March 24, 2011 (effective May 7, 2011) | Fondo Interbancario di Tutela dei Depositi (FITD) | Amount decreased from EUR 103,291.38 (ITL 200,000,000). |
| Netherlands Netherlands The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders... |
EUR 100,000 | 100% | October 7, 2008 | Before October 7, 2008 coverage was 100% of first EUR 20,000, 90% of next EUR 20,000 (hence a compensation of up to EUR 38,000). The raised amount is valid until December 31, 2010. | |
| Poland Poland Poland , officially the Republic of Poland , is a country in Central Europe bordered by Germany to the west; the Czech Republic and Slovakia to the south; Ukraine, Belarus and Lithuania to the east; and the Baltic Sea and Kaliningrad Oblast, a Russian exclave, to the north... |
EUR 100,000 (corresponding amount in PLN) | 100% | 30 December 2010 | Bankowy Fundusz Gwarancyjny (BFG) | Amount raised from EUR 50,000 on 30 December 2010 |
| Portugal Portugal Portugal , officially the Portuguese Republic is a country situated in southwestern Europe on the Iberian Peninsula. Portugal is the westernmost country of Europe, and is bordered by the Atlantic Ocean to the West and South and by Spain to the North and East. The Atlantic archipelagos of the... |
EUR 100,000 | 100% | November 2008 | Amount raised from EUR 25,000 to EUR 100,000 in November 2008. | |
| Slovakia Slovakia The Slovak Republic is a landlocked state in Central Europe. It has a population of over five million and an area of about . Slovakia is bordered by the Czech Republic and Austria to the west, Poland to the north, Ukraine to the east and Hungary to the south... |
Unlimited | 100 % | 1 November 2008 | Deposit Protection Fund | Credit unions are not covered. |
| Slovenia Slovenia Slovenia , officially the Republic of Slovenia , is a country in Central and Southeastern Europe touching the Alps and bordering the Mediterranean. Slovenia borders Italy to the west, Croatia to the south and east, Hungary to the northeast, and Austria to the north, and also has a small portion of... |
EUR 100.000 | 100% | July 28, 2010 | , the central bank Central bank A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries... of the Republic of Slovenia Slovenia Slovenia , officially the Republic of Slovenia , is a country in Central and Southeastern Europe touching the Alps and bordering the Mediterranean. Slovenia borders Italy to the west, Croatia to the south and east, Hungary to the northeast, and Austria to the north, and also has a small portion of... |
The Bank of Slovenia joined the Eurosystem Eurosystem The Eurosystem is the monetary authority of the Eurozone, the collective of European Union member states that have adopted the euro as their sole official currency... in 2007, when the euro Euro The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,... replaced the tolar Slovenian tolar The tolar was the currency of Slovenia from 1991 until the introduction of the euro on 1 January 2007. It was subdivided into 100 stotins... . |
| Spain Spain Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula... |
EUR 100,000 | 100% | 1998 | Fondos de Garantía de Depósitos (FGD) | |
| Sweden Sweden Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund.... |
SEK Swedish krona The krona has been the currency of Sweden since 1873. Both the ISO code "SEK" and currency sign "kr" are in common use; the former precedes or follows the value, the latter usually follows it, but especially in the past, it sometimes preceded the value... 500,000 |
100% | October 6, 2008 | National Debt Office - Deposit Insurance | From 1996 to October 2008, amount was SEK 250,000. |
| United Kingdom United Kingdom The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages... |
GBP Pound sterling The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence... 85,000 |
100% | Jan 01, 2011 | Financial Services Compensation Scheme Financial Services Compensation Scheme The Financial Services Compensation Scheme is a "statutory fund of last resort" in the United Kingdom, set up under the Financial Services and Markets Act 2000 to compensate customers of "authorised financial services firms" in the event of their insolvency. It consolidated previous compensation... |
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. |
Footnote: (*) According to Art. 7 (1a) of Directive 94/19/EC all EU Member States were expected to increase the amount to EUR 100,000 as of 31 December 2010. This is the case in all EU countries. For countries with non-EURO currency the limits are near to EUR 100,000 e.g. in UK it is GBP 85,000 which is near to that limit, depending on EUR-GBP rate.
Belarus
Deposit insurance in BelarusBelarus
Belarus , officially the Republic of Belarus, is a landlocked country in Eastern Europe, bordered clockwise by Russia to the northeast, Ukraine to the south, Poland to the west, and Lithuania and Latvia to the northwest. Its capital is Minsk; other major cities include Brest, Grodno , Gomel ,...
is handled by Agency of Deposit Compensation (Агенцтва гарантаванага пакрыцця банкаўскіх укладаў) and covers 100% of deposits, but only those belonging to the individuals, not organizations.
Iceland
Deposit insurance in IcelandIceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
is handled by Depositors' and Investors' Guarantee Fund
Depositors' and Investors' Guarantee Fund
The Depositors' and Investors' Guarantee Fund is the statutory deposit insurance scheme in Iceland. It is established under Act No...
(Tryggingarsjóður) and covers a minimum of 20 887 euros. However, the fund was drastically insufficient to cover the bank failures of the 2008–2011 Icelandic financial crisis, particularly Icesave. This case shows the limits of deposit insurance in protecting against systemic failure (as opposed to the collapse of a single bank or other institution).
Norway
Deposit insurance in NorwayNorway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
is handled by the Norwegian Banks' Guarantee Fund
Norwegian Banks' Guarantee Fund
The Norwegian Banks' Guarantee Fund is a Norwegian fund for deposit insurance.It was established on 1 July 2004, because of legislation that passed the Parliament of Norway one week before. It was a merger of the Commercial Banks' Guarantee Fund and the Savings Banks' Guarantee Fund...
(Bankenes sikringsfond) and covers deposits up to 2 million NOK.
Russia
RussiaRussia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
enacted deposit insurance law in December 2003 and established the national deposit insurance agency (DIA) in 2004. Until 2004, Russian banking system was divided: obligations of state-owned Sberbank
Sberbank
Sberbank Rossii is the largest bank in Russia and Eastern Europe. The company's headquarters are in Moscow and its history goes back to Cancrin's financial reform of 1841...
were guaranteed by law, while other banks were not insured in any way, creating an unfair advantage for Sberbank. The law addresses only individuals' deposits. Maximum compensation is limited to 700,000 roubles (equivalent to 23,000 US dollars or 17,000 Euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
at February 2009 exchange rate). 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.
The agency is set up as a state-owned corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, managed jointly by Central Bank and the government of Russia
Government of Russia
The Government of the Russian Federation exercises executive power in the Russian Federation. The members of the government are the prime minister , the deputy prime ministers, and the federal ministers...
. 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
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
. 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.
Switzerland
SwitzerlandSwitzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
has a privately operated deposit insurance system called 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 that are regulated by the Swiss Financial Market Supervisory Authority
Swiss Financial Market Supervisory Authority
Swiss Financial Markets Authority is the Swiss government body responsible for financial regulation. This includes the supervision of banks, insurance companies, stock exchanges and securities dealers as well as other financial intermediaries in Switzerland.FINMA is an independent institution...
(FINMA). See the list of members of the Deposit Protection of Swiss Banks and Securities dealers at http://www.einlagensicherung.ch/en/bankkunden-link/bankkunden-unterzeichner.htm
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 three weeks.
For further information see the FAQ at http://www.einlagensicherung.ch/en/bankkunden-link/bankkunden-faq.htm
Turkey
Deposit insurance in TurkeyTurkey
Turkey , known officially as the Republic of Turkey , is a Eurasian country located in Western Asia and in East Thrace in Southeastern Europe...
is handled by Savings Deposit Fund Insurance
TMSF
TMSF, the Savings Deposit Insurance Fund of Turkey is the governing body concerned with matters on fund management and insurance in the Turkish Banking System.-References:http://www.tmsf.org.tr/index.cfm?fuseaction=public.dsp_menu_content&menu_id=12...
(Tasarruf Mevduatı Sigorta Fonu) and covers a maximum of 50,000 TL.
British Isles Offshore
In response to the financial crisis in 2008, both Guernsey and Jersey introduced deposit compensation schemes. The Guernsey scheme was enacted in November 2008 and offers compensation of up to £50,000 per depositor, subject to an overall cap of £100 million in any five year period. The scheme does not cover company or, with minor exceptions, trust accounts. The Jersey scheme was enacted in November 2009 and offers a similar level of protection.The Isle of Man bank depositors' insurance scheme was introduced in 1991, 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.
Australia and New Zealand
The last bank failure in which Australian depositors lost money (and then only a minimal amount) was that of a trading bank, the Primary Producers Bank of Australia, in 1931 (Fitz-Gibbon and Gizycki 2001). Since the early 1930s, banking sector problems have been resolved without losses to depositors.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 was subsequently reduced to a maximum of $1 million per customer per institution. 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.
New Zealand has announced on October 12, 2008, that an opt-in scheme for retail deposits will be introduced. The scheme offers 100% cover to Banks and other institutions, with the first NZ$5billion free, and excess amounts charged at 10 basis point pa.
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 IndiaReserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
(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
Hong Kong Deposit Protection Board is an independent and statutory institution formed to manage and supervise the operation of Deposit Protection Scheme. The maximum protection amount of deposit was HKD$100,000 in 2006 (when the Hong Kong Deposit Protection Board was set up), it is now with a limit up to HKD$500,000 (or equivalent in RMB or other foreign currency).Malaysia
Malaysia introduced its Deposit Insurance in 2005. Malaysia Deposit Insurance Corporation (MDIC) or locally known as Perbadanan Insurans Deposit Malaysia (PIDM), is a statutory body formed under the Akta Perbadanan Insurans Deposit Malaysia 2005. Until December 2010, all deposit in Malaysia is fully guaranteed under the Government Deposit Guarantee Scheme.Philippines
Deposits in the Philippines up to PHP500,000 is covered by the Philippine Deposit Insurance Corporation [PDIC]. It was raised from the previous insurance coverage of PHP250,000.Thailand
The complete deposit protecion system was in introduced in Thailand by the establishment of the Deposit Protection Agency (DPA) on 11 August 2008, in accordance with the Deposit Protection Agency Act B.E. 2551. The objectives of the Agency as specified by law are providing protection to deposits in financial institutions system; administration of institutions subject to control under the Financial Institutions Businesses Act and liquidation of financial institutions whose licenses have been revoked. Deposit in Thailand is fully guaranteed until 10th August 2011. From 11th August 2011 until 10 August 2012 , the coverage drops to 50 million baht per depositor per bank. Thereafter, coverage is limited to THB one million per depositor per bank.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 enables banks to increase the money supply, without it underfunded banks might suffer a bank run which is prevented by the insurance. This encourages inflation.
Deposit insurance organizations and programmes
These are the Crown or State run deposit insurance corporations- Afghan Deposit Insurance Corporation (ADIC) (AfghanistanAfghanistanAfghanistan , officially the Islamic Republic of Afghanistan, is a landlocked country located in the centre of Asia, forming South Asia, Central Asia and the Middle East. With a population of about 29 million, it has an area of , making it the 42nd most populous and 41st largest nation in the world...
) - Federal Deposit Insurance CorporationFederal Deposit Insurance CorporationThe Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) (USA) - National Credit Union Share Insurance FundNational Credit Union Share Insurance FundThe National Credit Union Share Insurance Fund is administered by the National Credit Union Administration for the purpose of providing deposit insurance to protect deposits of credit union members at insured institutions in the United States. It was created in 1970 shortly after the creation of...
(part of NCUA) (USA) - American Share InsuranceAmerican Share InsuranceAmerican Share Insurance is a privately held deposit guaranty corporation that insures shares in some state chartered credit unions. ASI was established in 1974 as the National Guaranty Insurance Fund, changing its name to American Share Insurance in the early 1990s...
(ASI) (USA, private) - Barbados Deposit Insurance Corporation (BDIC) (BarbadosBarbadosBarbados is an island country in the Lesser Antilles. It is in length and as much as in width, amounting to . It is situated in the western area of the North Atlantic and 100 kilometres east of the Windward Islands and the Caribbean Sea; therein, it is about east of the islands of Saint...
) - Canada Deposit Insurance CorporationCanada Deposit Insurance Corporation-External links:*** Official CDIC site*...
(CDIC) (CanadaCanadaCanada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
) - Financial Services Compensation SchemeFinancial Services Compensation SchemeThe Financial Services Compensation Scheme is a "statutory fund of last resort" in the United Kingdom, set up under the Financial Services and Markets Act 2000 to compensate customers of "authorised financial services firms" in the event of their insolvency. It consolidated previous compensation...
(United KingdomUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
) - Deposit Insurance AgencyDeposit Insurance AgencyDeposit Insurance Agency is a State corporation providing deposit insurance in the Russian Federation. Its headquarters are located in Moscow....
(DIA) (RussiaRussiaRussia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
) - Instituto para la Protección al Ahorro Bancario (IPAB) (MexicoMexicoThe United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
) - Nigeria Deposit Insurance CorporationNigeria Deposit Insurance CorporationThe Nigeria Deposit Insurance Corporation was established on 15 June 1988 to strengthen the safety net for the newly liberalized banking sector, following the recommendation of former Central Bank of Nigeria governor Ola Vincent...
(NDIC) NigeriaNigeriaNigeria , officially the Federal Republic of Nigeria, is a federal constitutional republic comprising 36 states and its Federal Capital Territory, Abuja. The country is located in West Africa and shares land borders with the Republic of Benin in the west, Chad and Cameroon in the east, and Niger in... - Philippine Deposit Insurance CorporationPhilippine Deposit Insurance CorporationThe Philippine Deposit Insurance Corporation is a government-run Philippine deposit insurance fund. It was established on June 22, 1963 by Republic Act 3591. It guarantees deposits up to P500,000.-External links:*...
(PDIC) (PhilippinesPhilippinesThe Philippines , officially known as the Republic of the Philippines , is a country in Southeast Asia in the western Pacific Ocean. To its north across the Luzon Strait lies Taiwan. West across the South China Sea sits Vietnam...
) - Bulgarian Deposit Insurance Fund (DIF) (BulgariaBulgariaBulgaria , officially the Republic of Bulgaria , is a parliamentary democracy within a unitary constitutional republic in Southeast Europe. The country borders Romania to the north, Serbia and Macedonia to the west, Greece and Turkey to the south, as well as the Black Sea to the east...
) - Korea Deposit Insurance CorporationKorea Deposit Insurance CorporationThe Korea Deposit Insurance Corporation is a deposit insurance corporation, established in 1996 in South Korea to protect depositors and maintain the stability of the financial system. The major functions of KDIC can be classified into five categories such as insurance management, risk...
(KDIC) (South KoreaSouth KoreaThe Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
) - Fonds de Garantie des DepôtsFonds de Garantie des DepôtsThe Fonds de Garantie des Dépôts is a French deposit insurance fund. It was established on June 25, 1999 and guarantees deposits up to €70,000....
(FDG) (FranceFranceThe French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
) - Malaysia Deposit Insurance Corporation (MDIC) (Malaysia)
- Depositors' Compensation Scheme (Isle of ManIsle of ManThe Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is...
) - Deposit Insurance and Credit Guarantee Corporation (DICGC) (IndiaIndiaIndia , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
) - Savings Deposit Insurance FundTMSFTMSF, the Savings Deposit Insurance Fund of Turkey is the governing body concerned with matters on fund management and insurance in the Turkish Banking System.-References:http://www.tmsf.org.tr/index.cfm?fuseaction=public.dsp_menu_content&menu_id=12...
(TMSF) (TurkeyTurkeyTurkey , known officially as the Republic of Turkey , is a Eurasian country located in Western Asia and in East Thrace in Southeastern Europe...
) - Deposit Protection Agency (DPA) (ThailandThailandThailand , officially the Kingdom of Thailand , formerly known as Siam , is a country located at the centre of the Indochina peninsula and Southeast Asia. It is bordered to the north by Burma and Laos, to the east by Laos and Cambodia, to the south by the Gulf of Thailand and Malaysia, and to the...
)
See also
Related topics- Moral hazardMoral hazardIn economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
, from the finance system point of view - Bank runBank runA bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
- Financial crisisFinancial crisisThe term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
- Diamond-Dybvig modelDiamond-Dybvig modelThe Diamond–Dybvig model is an influential model of bank runs and related financial crises. The model shows how banks' mix of illiquid assets and liquid liabilities may give rise to self-fulfilling panics among depositors.-Theory:The model, published in 1983 by Douglas W...
, a model relating to runs on banks
Research and guidance papers on deposit insurance
Related research papers- Research and Guidance Committee(2006), "General Guidance to Promote Effective Interrelationships among Financial Safety Net Participants", IADI, January 2006
- Research and Guidance Committee(2005), "General Guidance for the Resolution of Bank Failures", IADI, December 2005
- Research and Guidance Committee(2005), "General Guidance for Developing Differential Premium Systems", IADI, February 2005
- Asli Demirguc-Kunt, Baybars Karacaovali, Luc Laeven (2005), "Deposit Insurance Around the World: A Comprehensive Database", World BankWorld BankThe World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
Policy Research Working Paper 3628, June 2005 - Working Group on Deposit Insurance (2001), "Guidance for Developing Effective Deposit Insurance Systems", Financial Stability Forum, September 2001
- Working Group on Deposit Insurance (2001), "Volume II: Guidance for Developing Effective Deposit Insurance Systems", Financial Stability Forum, September 2001
- Mark D. Flood (1992), "The Great Deposit Insurance Debate", Federal Reserve Bank of St. Louis, Review, July/August 1992
External links
InternationalAfrica
- Deposit Protection Fund Board (Kenya)
- Nigeria Deposit Insurance Corporation (NDIC)
- Deposit Protection Board (DPB) (Zimbabwe)
Americas
- Canada Deposit Insurance Corporation (CDIC)
- Deposit Insurance Corporation of Ontario (DICO)
- Federal Deposit Insurance Corporation (FDIC)
- Instituto para la Protección al Ahorro Bancario (IPAB) (Mexico)
- Fundo Garantidor de Créditos (FGC) (Brazil)
- Fondo de Garantias de Instituciones Financieras (Fogafin) (Colombia)
- Fondo de Seguro de Depósitos (Peru)
- Instituto de Garantía de Depósitos (IGD) (El Salvador)
- Jamaica Deposit Insurance Corporation (JDIC)
- Autorité des Marchés Financiers (Québec)
- National Credit Union Share Insurance Fund (NCUSIF) (USA)
- Seguro de Depósitos Sociedad Anónima (SEDESA) (Argentina)
- Agencia de Garantía de Depósitos (AGD) (Ecuador)
Asia
- Deposit Insurance and Credit Guarantee Corporation (DICGC) (India)
- Korea Deposit Insurance Corporation (KDIC)
- Deposit Insurance Corporation of Japan (DICJ)
- Malaysia Deposit Insurance Corporation (MDIC)
- Philippine Deposit Insurance Corporation (PDIC)
- Deposit Insurance of Vietnam
- Hong Kong Deposit Protection Board
- Singapore Deposit Insurance Corporation (SDIC)
- Central Deposit Insurance Corporation (CDIC) (Taiwan)
Europe
- European Forum of Deposit Insurers (EFDI) (Europe)
- Financial Services Compensation Scheme (United Kingdom)
- Beschermingsfonds / Fonds de Protection / Protectionfund (Belgium)
- National Debt Office - Deposit Insurance (Sweden)
- Bulgarian Deposit Insurance Fund (DIF)
- Deposit Insurance Agency (DIA) (Russian Federation)
- Albanian Deposit Insurance Agency
- Deposit Insurance Fund (Czech Republic)
- Deposit Guarantee Fund (Finland)
- Fonds de Garantie des Dépôts (FGD) (France)
- National Deposit Insurance Fund (NDIF) (Hungary)
- Fondo Interbancario di Tutela dei Depositi (FITD) (Italy)
- Savings Deposit Insurance Fund (Turkey)
- Depositors' Compensation Scheme (Isle of Man)
- Fondos de Garantía de Depósitos (FGD) - Deposits Guarantee Funds (Spain)
- Deposit Protection of Swiss Banks and Securities Dealers (Switzerland)
Others
Criticisms