Deposit insurance
Deposit insurance, deposit protection or deposit guarantee 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 or deposit guarantee systems are one component of a financial system safety net that promotes financial stability, and are typically integrated with bank
Overview
Deposit insurance, deposit protection or deposit guarantee 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 or deposit guarantee systems are one component of a financial system safety net that promotes financial stability, and are typically integrated with bank regulation and supervision.
History in the United States
The first deposit insurance system in the United States, which also protected holders of banknotes, was established by New York State in 1829 under the leadership of governor Martin Van Buren. Its promoter was Joshua Forman, a businessman from Syracuse, who took inspiration for it from arrangements established among the Hong merchant community of Guangzhou. Deposit and banknote insurance schemes were subsequently created in Vermont in 1831, Indiana in 1834, Michigan in 1836, Ohio in 1845, and Iowa in 1858. The Michigan scheme only lasted until 1842, but the five others operated successfully until the National Bank Act made them obsolete in the 1860s. A second wave of state-level deposit insurance schemes were established in Oklahoma in 1908, Kansas, Nebraska and Texas in 1909, Mississippi in 1914, South Dakota in 1915, and North Dakota and Washington in 1917. All of these, however, had become insolvent by early 1930 at the start of the Great Depression. The establishment of the Federal Deposit Insurance Corporation by the 1933 Banking Act brought a lasting solution to the challenge of deposit insurance in the United States. It was subsequently emulated by many other jurisdictions, as illustrated by the names of the Philippine Deposit Insurance Corporation (est. 1963), Canada Deposit Insurance Corporation (est. 1967), Deposit Insurance Corporation of Japan (est. 1971), Nigeria Deposit Insurance Corporation (est. 1988), Korea Deposit Insurance Corporation (est. 1996), Kenya Deposit Insurance Corporation (est. 2012), and China Deposit Insurance Corporation (est. 2019).
Process
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 they rely on customer deposits that can be withdrawn on little or no notice, banks in financial trouble are prone to bank runs, 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 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 and Quebec), Germany, Italy, and the United States.
By country
According to the International Association of Deposit Insurers (IADI), as of 31 January 2014, 113 countries have instituted some form of explicit deposit insurance, up from 12 in 1974. Another 41 countries are considering the implementation of an explicit deposit insurance system.
Central Africa
Banks in the Economic Community of Central African States are eligible for an international system called the Deposit Guarantee Fund in Central Africa (FOGADAC). Although the system is well capitalized, details of its failure response process remain to be determined.
South Africa
The Corporation for Deposit Insurance (CODI), a subsidiary of the South African Reserve Bank, was launched in April 2024. It insures up to R100,000 per depositor in the event of a bank failure.
Nigeria
The Nigeria Deposit Insurance Corporation (NDIC) is an independent Nigerian government agency established in 1989 to insure bank deposits, supervise financial institutions, and help resolve failing banks in order to maintain stability in Nigeria’s financial system. It protects depositors by guaranteeing insured funds up to a specified limit and ensures prompt payment when banks fail. Under its deposit insurance scheme, the NDIC guarantees payment of deposits up to ₦5,000,000 for Deposit Money Banks and Mobile Money Operators, and ₦2,000,000 for Microfinance Banks, Primary Mortgage Banks, and Payment Service Banks, in the event of a bank failure..
Brazil
In Brazil, the creation of deposit insurance was authorized by Resolution 2197 of 1995, the National Monetary Council. This standard mandated the creation of a protection mechanism for credit holders against financial institutions, called "Credit Guarantee Fund" (FGC). Currently, the FGC is regulated by Resolution 4222 of 2013. The Fiscal Responsibility Act prohibits the use of public funds to finance the losses, so it is formed exclusively by compulsory contributions from the participating institutions. The warranty is limited to R$250,000 per depositor. The Guarantor Credit Union Fund (FGCoop) was created in order to protect depositors of credit unions and cooperative banks. As the FGC, the FGCoop guarantees up to R$250,000 and consists of compulsory contributions of cooperatives and cooperative banks.
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 can be found at 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 and guaranteed investment certificates with a term of longer than five years held in a CDIC-registered financial institution are insured as of 30 April 2020. 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 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 this reform can be traced back to the 19th century, such as 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 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 bank failures similar to the US are much less likely.
Mexico
In Mexico, the Instituto para la Protección al Ahorro Bancario (IPAB) is the deposit insurance set up by the country for account holders in Mexico. It insures up to 400,000 UDIs (Unidad de Inversión), the equivalent of $2,743,209.20 pesos for each account (as of July 2021). 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.
United States
The Federal Deposit Insurance Corporation (FDIC) is the deposit insurer for the United States. Prior to the Civil War and in the 1920s, there were various sub-national deposit insurance schemes. The United States was the second country (after Czechoslovakia) to institute national deposit insurance when it established the FDIC in the wake of the 1933 banking crisis that accompanied the Great Depression. Credit-union share accounts at federally insured credit unions are covered by the National Credit Union Share Insurance Fund, which is administered by the NCUA; several state-chartered credit unions instead use private insurers whose coverage is not backed by the full faith and credit of the United States. The FDIC and NCUA each insure up to $250,000 for each owner at an institution. Separately from these, the Securities Investor Protection Corporation provides limited asset protection, but not insurance, for the cash and securities of the customers of failed investment brokerages. In Massachusetts, the Depositors Insurance Fund (DIF) insures deposits in excess of the FDIC limits at state-chartered savings banks.
European Union
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes required all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euros per person. On 7 October 2008, the Ecofin meeting of EU ministers of finance agreed to increase the minimum amount to 50,000. Timelines and details on procedures for the implementation, which was 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 their limits to discourage people from transferring their savings to Irish banks. In November 2007 a comprehensive report was published by the EU, with a description and comparison of each Insurance Guarantee Scheme in place for all EU member states. The report concluded that many of the schemes had restricted the appliance of guarantees to retail consumers, usually private individuals, although small or medium (SME) businesses were also sometimes placed into the retail category. No schemes applied to large wholesale customers: the rationale was that the latter are often in a better position than retail customers to assess the financial risks of particular firms with whom they engage, or are able themselves to reduce their risk by using several financial banks/institutes. The report recommended this practice to continue, as limiting of the scheme's to "retail customers (excl./incl. SME businesses)" helps to reduce the cost of the scheme but also helps to increase its available funds for those who actually need the guarantee when it is activated for the protection of claimants.
Wikipedia contributors · Deposit insurance · revision 1380724625 · CC BY-SA 4.0 · Plain text extracted and formatting adapted; tags derived from linked topics.