Deposit Insurance - Experiences from Bank Runs During the Great Depression Led to the Introduction of Deposit Insurance in the Us

Deposit insurance

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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

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1 Why it exists

2 How it works

3 Overview by country

3.1 North America

3.1.1 United States

3.1.2 Canada

3.1.3 Mexico

3.2 Caribbean and South America

3.3 European Union

3.3.1 By EU country

3.4 Rest of Europe

3.4.1 Belarus

3.4.2 Iceland

3.4.3 Norway

3.4.4 Russia

3.4.5 Switzerland

3.4.6 Turkey

3.5 British Isles Offshore

3.6 Australia and New Zealand

3.7 Asia

3.7.1 India

3.7.2 Hong Kong

3.7.3 Malaysia

3.7.4 Thailand

4 Economic impact

5 Deposit insurance organizations and programmes

6 See also

7 References

8 Research and guidance papers on deposit insurance

9 External links

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 Because banks rely on customer deposits that can be withdrawn on little or no notice, banks are prone to a Bank run, where depositors seek to withdraw funds quickly ahead of a possible bank insolvency.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

[edit] 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.

[edit] 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).

[edit] North America

[edit] 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