Deposit insurance

Deposit insurance
Experiences from bank runs during the Great Depression led to the introduction of deposit insurance in the US.
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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.

Contents

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 banking). 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 Because banks rely on customer deposits that can be withdrawn on little or no notice, banks are prone to a Bank run, where depositors seek to withdraw funds quickly ahead of a possible bank insolvency.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.[1][2]

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.[3] 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 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 including 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, the Federated States of Micronesia, and Puerto Rico are insured by the US Federal Deposit Insurance Corporation.

Cameroon, the Central African Republic, Chad, Congo, Equatorial Guinea, and Gabon 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).

North America

United States

Further information: Bank regulation in the 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.

In Massachusetts, the Depositors Insurance Fund (DIF) insures deposits in excess of the FDIC limits at state-chartered savings banks.[4]

Canada

Canada created the Canada Deposit Insurance Corporation (CDIC) 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 C$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 Contracts 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.[5] Some funds in the Registered Retirement Savings Plan or Registered Retirement Income Fund 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

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 and South America

European Union

Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes[6] 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.[7] 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. [5]

Country Savings limit Coverage Valid since Deposit insurance organization Comments and previous amounts
Belgium EUR 100,000 (*) 100% Fonds de Protection / Beschermings Fonds / Protection Fund [8] Previously 20.000 EUR before 2009.
Bulgaria 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 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.[9]
Denmark Ordinary deposit guarantee scheme applies after September 30, 2010, covers up to DKK750,000 100% 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.[10][11]
Finland EUR 100,000 100% 1998 Deposit Guarantee Fund Increased from EUR 25,000 to EUR 50,000 on October 8, 2008[12] and to EUR 100,000 on January 1, 2011.[13]
France EUR 100,000[14] 100% Fonds de Garantie des Dépôts (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",[15] 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 EUR 100,000 100% Jan 01, 2011
  • Bundesverband deutscher Banken BdB (for private banks)
  • Bundesverband Öffentlicher Banken Deutschlands VÖB (for public sector banks)
  • Bundesverband der Deutschen Volksbanken und Raiffeisenbanken BVR (for co-operative banks)
  • Deutsche Sparkassen- und Giroverband DSGV (Savings banks)
 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..."[16]

An unlimited state guarantee was announced in October 2008 (and extended in July 2009). The legal details are nevertheless unclear.[17] "It is a political declaration" said Torsten Albig.[18]
Greece EUR 100,000 100% October 2008 Was 20,000 EUR, increased in October 2008
Hungary National Deposit Insurance Fund (NDIF)
Ireland Unlimited[19] September 2008 Central Bank and Financial Services Authority of Ireland Amount raised to unlimited in September 2008
Italy 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).[20]
Netherlands 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.[21]
Poland EUR 100,000 (corresponding amount in PLN)[22] 100% 30 December 2010 Bankowy Fundusz Gwarancyjny (BFG) Amount raised from EUR 50,000 on 30 December 2010
Portugal EUR 100,000 100% November 2008 Amount raised from EUR 25,000 to EUR 100,000 in November 2008.[23]
Slovakia Unlimited 100 % 1 November 2008 Deposit Protection Fund Credit unions are not covered.[24]
Slovenia EUR 100.000 100% July 28, 2010 Slovene: Banka Slovenije, the central bank of the Republic of Slovenia [25]
The Bank of Slovenia joined the Eurosystem in 2007, when the euro replaced the tolar.
Spain EUR 100,000 100% 1998 Fondos de Garantía de Depósitos (FGD) [26]
Sweden SEK 500,000 100% October 6, 2008 National Debt Office - Deposit Insurance From 1996 to October 2008, amount was SEK 250,000.[27]
United Kingdom GBP 85,000 100% Jan 01, 2011 Financial Services Compensation Scheme 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.[28]

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.

Rest of Europe

Belarus

Deposit insurance in Belarus 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.[29]

Iceland

Deposit insurance in Iceland is handled by Depositors' and Investors' Guarantee Fund (Tryggingarsjóður) and covers a minimum of 20 887 euros.[30] 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 Norway is handled by the Norwegian Banks' Guarantee Fund (Bankenes sikringsfond) and covers deposits up to 2 million NOK.[31]

Russia

Russia enacted deposit insurance law in December 2003 and established the national deposit insurance agency (DIA) in 2004.[32][33] 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.[34] The law addresses only individuals' deposits. Maximum compensation is limited to 700,000 roubles (equivalent to 23,000 US dollars or 17,000 Euro 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.[35]

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.[36]

Switzerland

Switzerland has a privately operated deposit insurance system called Deposit Protection of Swiss Banks and Securities Dealers.[37] 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 (FINMA).[38] 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 Turkey is handled by Savings Deposit Fund Insurance (Tasarruf Mevduatı Sigorta Fonu) and covers a maximum of 50,000 TL.[39]

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 [40]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 [41] 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. [42]

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.[43]

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.[44] 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.

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

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.[45]

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

See also

Related topics

References

  1. ^ http://www.econtalk.org/archives/2009/10/calomiris_on_th.html
  2. ^ Golembe, Carter (1960). "The Deposit Insurance Legislation of 1933: An Examination of Its Antecedents and its Purposes". Political Science Quarterly 75 (2): 181–200. JSTOR 2146154. 
  3. ^ Sebastian Schich (July 2008). "Financial turbulence: some lessons regarding deposit insurance". Financial Market Trends. OECD. http://www.oecd.org/dataoecd/32/54/41420525.pdf. Retrieved 2008-10-11. 
  4. ^ http://www.difxs.com
  5. ^ CDIC Members, showing foreign entities such as HSBC, ING and UBS
  6. ^ Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes
  7. ^ International Herald Tribune, October 7, 2008: Europe seeks unified policy on bank crisis
  8. ^ Protection Fund for Deposits and Financial Instruments, accessed June 15, 2011
  9. ^ Deposit Insurance Fund - Czech Republic
  10. ^ (The Danish Banker's Association, October 6, 2008: The Danish financial sector and the Danish government agree on 2-year guarantee scheme for Danish banks)
    http://www.danskebank.com/en-uk/ir/the-group/Pages/TheDanishStateGuarantee.aspx
    http://www.oem.dk/sw22890.asp
  11. ^ (The Danish Banker's Association, October 6, 2008: The Danish Parliament has adopted the financial guarantee)
  12. ^ Deposit Guarantee Fund, accessed October 8, 2008
  13. ^ Deposit Guarantee Fund, accessed January, 2010
  14. ^ Fonds des garantie des depôts: FAQ, accessed Jan 01, 2011
  15. ^ L'Etat "ne laissera aucun établissement bancaire faire faillite" (official speech, closure of the Coucil of Ministers on 13/10/2010) http://www.gouvernement.fr/premier-ministre/nicolas-sarkozy-a-presente-le-plan-de-soutien-aux-banques
  16. ^ By-law of the deposit protection fund of the BdB, June 2010
  17. ^ BBC Business Editor's blog, accessed October 8, 2008
  18. ^ Germany's guarantee of bank deposits held by private savers is a ``political step meant to boost confidence in the banking system, the government said, ruling out any parliamentary moves to back up the pledge in law http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayQUgBTLYJEc&refer=germany
  19. ^ Goodway, Nick (September 30, 2008). "Irish government steps in with an unlimited guarantee on all its banks' deposits and loans". Daily Mail (London). http://www.dailymail.co.uk/money/article-1064604/Irish-government-steps-unlimited-guarantee-banks-deposits-loans.html. 
  20. ^ Fondo Interbancario di Tutela dei Depositi: Deposit Guarantee, accessed November 8, 2011
  21. ^ Deposit guarantee scheme, accessed October 7, 2008
  22. ^ Bankowy Fundusz Gwarancyjny: Bank Guarantee Fund, accessed April 10, 2011
  23. ^ Fundo de Garantia de Depósitos: Deposit Guarantee Fund, accessed November 3, 2008
  24. ^ Deposit Protection Fund - Slovakia
  25. ^ Deposit Guarantee Scheme - Bank of Slovenia, accessed June 9, 2010
  26. ^ Fondos de Garantía de Depósitos: Money Deposits Guaranteed, accessed May 23, 2010
  27. ^ National Debt Office, October 6, 2008: Expanded deposit insurance
  28. ^ Financial Services Compensation Scheme: Deposit claims FAQs, accessed October 6, 2008[dead link]
  29. ^ Deutsche Welle, accessed on September 1, 2010
  30. ^ Depositors’ and Investors’ Guarantee Fund, accessed on February 4, 2009
  31. ^ The Norwegian Banks' Guarantee Fund, accessed on October 9, 2008
  32. ^ (English) Federal law on insurance of housenhold deposits in banks of the Russian Federation, full text
  33. ^ (English) Deposit insurance agency, DIA official site
  34. ^ (English) Banking and Deposit Insurance in Russia. World Bank, 2006, p.14 [1]
  35. ^ (English) Results of DIA Activities in 2007 and DIS Development Issues DIA official site
  36. ^ Arrest over Russian banker murder. BBC, January 15, 2007
  37. ^ [2]"Deposit Protection of Swiss Banks and Securities Dealers"
  38. ^ FINMA
  39. ^ Tasks and Duties (in English)
  40. ^ [3]
  41. ^ [4]
  42. ^ "Tynwald Approves Raising of £50,000 Savings Guarantee", Isle of Man Today (9 October 2008). Retrieved on 2008-10-12; "Isle of Man Pledges Action on Kaupthing Collapse", Isle of Man Today (10 October 2008). Retrieved on 2008-10-12; Lewis, Paul (11 October 2008). "Offshore Icelandic Funds At Risk", BBC News. Retrieved on 2008-10-12.
  43. ^ http://fsgstudy.treasury.gov.au/content/Davis_Report/04_Chapter2.asp
  44. ^ "Deposit guarantee scheme introduced". Reserve Bank of New Zealand. 2008-10-11. http://www.rbnz.govt.nz/news/2008/3462912.html. Retrieved 2008-10-11. 
  45. ^ http://www.thailawforum.com/thai-deposit-insurance-law.html

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