Deposit Insurance

Deposit Insurance

The deposit insurance system (DIS) is a mechanism for protecting the deposits of individuals in banks through their insurance (guarantee). The deposit insurance system was introduced in most countries of the world to protect depositors from partial losses or losses in full, caused by the inability of the bank to pay its debts on time.

The deposit insurance system is one of the components of the financial system's security, which contributes to its financial stability. The presence of a deposit insurance system increases the population's confidence in the banking system.

Why it exists

Banks are allowed and, as a rule, engaged in crediting or investing a large part of monetary funds, rather than giving them to storage and maintaining them in full. If many of the borrowers of the bank do not have the opportunity to repay their loans payable, the bank's creditors, including investors, are likely to risk. Because failures of banking institutions have the ability to cause a wide range of harmful events, including economic downturns, representatives of government structures introduce a deposit insurance system to protect deposits of depositors and give them confidence that their funds will not be at risk.

How it works

If a bank stops working and a license to conduct banking operations is withdrawn, its depositors are given fixed cash payments. Depositors do not need to enter into any contract for deposit insurance. It is carried out by virtue of the Law and for this function the state creates a special organization - the Agency for Deposit Insurance.

Deposit insurance agencies are in most cases introduced or created by the government, and they can also be part of the Central Bank of the country.

There are a number of countries with an insurance system for more than one deposit, these are Austria, Canada (Ontario and Quebec), Germany, Italy and the United States. The structures introduce a deposit insurance system to protect deposits of depositors and give them confidence that their funds will not be at risk.

Overview country by country:

North America

United States

In the pre-war period and in the 1920s, various schemes of deposit insurance were tested in the USA. The United States of America was the first country to have a bank deposit insurance system. It was created by the necessity caused by the economic crisis that broke out - the Great Depression. As a result, in 1933 the Federal Deposit Insurance Corporation was created by the Glass-Steagall Act.

From the very beginning, the insurance limit was 5,000 US dollars. Until 2008, the insurance indemnity in the United States according to the standard was $ 100,000. In 2008, it was raised to $ 250,000.

Canada

Canada established the Canadian Deposit Insurance Corporation (CDIC) in 1967. It is similar to the Federal Deposit Insurance Corporation in the United States. Since 1967, 43 financial institutions were not in Canada, and all of them were members of the CDIC. Since 1996, there has not been a single failure. Yet insurance for registered member organizations is limited, and covers only the first $ 100,000 in very separate categories of accounts.

The Caribbean and South America

Brazil offers deposit insurance, which is limited to R $ 250,000.00 on the basis of a credit financial institution.

European Union

Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit insurance requires that all Member States guarantee deposit insurance - at least 90% of the deposit, at least EUR 20,000 per person. On October 7, 2008, the Ministers of Finance agreed to increase the minimum amount of 50,000 euros at a meeting of the Council of the EU.

Other states of Europe

Albania

Deposit insurance in Albania is carried out by the Albanian Deposit Insurance Agency and covers a deposit of a maximum of 2,500,000. All about 23.000 US dollars.

Belarus

Deposit insurance in Belarus is processed by the "Deposit Insurance Agency" and covers 100% of the deposits, but only those that are not related to legal entities, but to individuals.

Iceland

Deposit insurance in Iceland is carried out by the "Guarantee fund of investors and depositors" and covers deposits of at least 20 887 euros.

Norway

Insurance of deposits in Norway is handled by the "Insurance Fund" and covers a deposit of up to 2 million NOK.

Russian Federation

The Russian Federation adopted the Deposit Insurance Law in December 2003 and established the National Deposit Insurance Agency (DIA) in 2004. The maximum amount of compensation is limited to 700,000 rubles (equivalent to 23,000 US dollars or 17,000 euros as of February 2009 at the exchange rate). As of January 2008, the DIA funds exceeded 68 billion rubles (2.8 billion US dollars).

15 "insured events" were registered (bankruptcy cases involving the DIA) in 2007, as a result of which the payments amounted to 350 million rubles.

The Deposit Insurance Agency operates as a state corporation, and is managed jointly with the Central Bank and the Russian government.

Membership of the DIA is a mandatory requirement for any bank that works with the money of private investors. The Central Bank of Russia uses the admission of banks to the DIA system, and gets rid of insolvent banks and those who are engaged in money laundering.

Andrei Kozlov, a member of the board of the Central Bank, responsible for the DIA, was killed, as he was directly related to the uncompromising attitude towards those who are engaged in money laundering.

Switzerland

Switzerland has a private deposit insurance system, that is called "Protection of deposits of Swiss banks and securities dealers." They guarantee up to CHF 100 000 per customer bank. Membership is mandatory for all banks and securities dealers, and is regulated by the Swiss Financial Market Supervisory Authority (FINMA). In Switzerland, however, this mechanism has not yet been used - there has not been bankruptcy of banks yet.

Turkey

Deposit insurance in Turkey is handled by the "Savings Deposits and Insurance Fund" (Tasarruf Mevduatı Sigorta Fonu) and covers deposits up to 100,000 TL.

British Virgin Islands

In response to the financial crisis of 2008, the independent islands of Guernsey and Jersey introduced a deposit of compensation schemes. In Guernsey, the scheme was adopted in November 2008 and provides compensation of up to 50 000 pounds sterling per depositor, provided that the maximum total fixed interest rate will be £ 100 million in any five year period. The scheme does not apply to companies or trust accounts. In Jersey, the scheme was adopted in November 2009 and offers a similar level of protection.

Australia and New Zealand

Recent bank failures in which Australian investors have lost money (but only the minimum amount) was trading bank, the primary producer of the Australian banks, in 1931. Since the beginning of 1930, problems in the banking sector have been resolved without loss of depositors.

On October 12, 2008, the Australian Prime Minister announced that in response to the economic crisis of 2008 100% of deposits would be protected for the next three years. Later it was reduced to $ 1 million for each client in the institution. On September 11, 2011, it was announced that the insurance would drop to $ 250,000, that entered into force on February 1, 2012.

New Zealand announced the refusal to participate in the scheme for deposits of individuals on October 12, 2008. The expansion of the scheme was announced on August 25, 2009, and the scheme worked until December 31, 2011. Since January 1, 2012, bank deposits in New Zealand are not protected by the state.

Asia

India

India introduced deposit insurance in 1962. Deposit Insurance Corporation has been operational since 1 January 1962 under the aegis of the Reserve Bank of India (RBI). 1971 witnessed the creation of another organization - the Credit Insurance Corporation of India.

Hong Kong

The Hong Kong Deposit Protection Board is an independent and statutory organization created to manage and monitor the operation of the deposit protection system. Maximum protection is the deposit amount of HK $ 100,000. In 2006, the limit was increased to HK $ 500,000 (or equivalent in RMB or another foreign currency).

Japan

The Deposit Insurance System in Japan is operated by the Deposit Insurance Corporation, which has been in effect since 1971. The capital of this corporation was formed in equal shares by the government, the bank of Japan and private banks. Insurance compensation is paid from the insurance fund, which is formed from annual contributions of 0.008 percent of the bank's insured deposits. Compensation to depositors is paid only if their deposits were in yens, with a maximum amount of 10 million yens.

Malaysia

Malaysia introduced a deposit insurance system in September 2005. The Malaysian Deposit Insurance Corp. is the Legislative authority. All commercial and Islamic banks, including foreign banks operating in Malaysia, are mandatory institutions participating in the PIDM.

The maximum limit of coverage is RM250,000 per one depositor of one institution. There is a limit of RM250,000 for Islamic accounts, joint accounts, trust accounts and accounts of individual entrepreneurs, partnerships or separately insured individuals carrying out professional practise.

Philippines

Deposits in the Philippines up to PHP 500,000 are covered by the Philippine Deposit Insurance Corporation.

Taiwan

Deposits in Taiwan up to NT $ 3,000,000 are covered by the central deposit insurance corporation.

Thailand

A full deposit insurance system was introduced in Thailand as a result of the establishment of the Deposit Protection Agency (DPA) on August 11, 2008, in accordance with the Deposit Protection Agency Act B.E. 2551. The Agency's objectives, as indicated by the Act, are to protect deposits in the financial institutions of the system; from August 11, 2011 until August 10, 2012, coverage fell to 50 million bahts per one depositor in one Bank. After that, coverage was limited to THB, and one million per one depositor in one Bank was set.

Economic impact

When a national state has a deposit insurance system, foreign investors are likely to passively contribute large sums of money to the Bank from those indicated by the state.

When the state has a bank deposit insurance scheme (for all practical purposes), it is more likely that the national state will have a higher level of passive foreign investment (within the acceptable insurance amount). Deposit insurance allows banks to increase money supply, and in absence of the foregoing, insufficiently funded banks may suffer in operation that prevents insurance, and it stimulates inflation.

The existing deposit insurance systems in the world are very diverse. For example, there are countries in which two or more deposit insurance systems operate.