Deposit insurance

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.

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 Because they rely on customer deposits that can be withdrawn on little or no notice, banks in financial trouble are prone to bank runs, where depositors seek to withdraw funds quickly ahead of a possible bank insolvency.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.

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. More recently, 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.

In Mexico, the Instituto para la Proteccion al Ahorro Bancario (IBAP) is the deposit insurance set up by the country for account holders in Mexico. It insures up to 400,000 UDIs (Unidad de Inversion), the equivalent of $2,406,702.40 pesos for each account. 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.

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 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. 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.

Russia 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 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 1,400,000 roubles (equivalent to approximately 21,800 US dollars or 19,500 Euro at September 2016 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.

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.

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. On 11 September 2011, it was announced that the guarantee would fall to $250,000, effective 1 February 2012.

In Bangladesh deposit insurance scheme was first introduced in 1984 by dint of "The Deposit Insurance Ordinance 1984". In July 2007 the Ordinance was repealed by an Act passed by the parliament called "The Bank Deposit Insurance Act 2000". At present, Deposit Insurance system in Bangladesh is administered by the said Act. In accordance to the Act Bangladesh Bank is authorized to carry out a Fund is called the "Deposit Insurance Trust Fund(DITF)". The DITF is administered and managed by a Trustee Board. In case of winding up of an insured bank, every depositor of the bank will be paid an amount not exceeding to BDT 100,000 as per "The Bank Deposit Insurance Act 2000".

Malaysia introduced its Deposit Insurance System in September 2005. Malaysia Deposit Insurance Corporation (MDIC) (Malay: Perbadanan Insurans Deposit Malaysia (PIDM)) is a statutory body formed under the Malaysia Deposit Insurance Corporation Act (Akta Perbadanan Insurans Deposit Malaysia). All commercial and Islamic banks, including foreign banks operating in Malaysia, are compulsory member institutions of PIDM. The maximum coverage limit is RM250,000 per depositor per member institution. Islamic accounts, joint accounts, trust accounts and accounts of sole proprietorships, partnerships or persons carrying on professional practices are separately insured up to the RM250,000 limit.



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