:: Deposit Insurance Schemes - A Comparative Analysis ::

Many countries continue to be plagued with bank failures, and because banks form the nuclei of any financial system, these failures often result in financial crisis, instability and chaos in their economies. As they struggle to find the solutions, one of the answers, in addition to increased regulations and supervision of banks, has been the establishment of deposit insurance schemes.

As far back as the 1930’s during the period of the Great Depression, when over 9,000 banks failed in the USA, they introduced deposit insurance, which has over the years proved to be very effective. The Federal Deposit Insurance Corporation (FDIC), the first formal deposit insurance scheme, was established in 1934, since then many other countries have introduced deposit insurance. Countries such as Norway, India, Canada, Norway and Japan introduced deposit insurance in the ‘60s and ‘70s. However, as the incidence of banking crises escalated, deposit insurance schemes were established in many other countries ( see Table1 ).

Countries establishing deposit insurance schemes should have two main goals in mind. Firstly, that of protecting depositors, should a financial institution fail, thereby guarding against contagious deposit runs on otherwise healthy institutions. Secondly, to promote confidence and stability in the financial sector, while minimising the risk of moral hazard. The problem of moral hazard arises from distortion in incentives induced by deposit protection, as the guarantee may encourage bankers to assume greater risks and depositors not to discriminate between safe and unsafe banks.

Deposit insurance can be in two forms. There is implicit deposit insurance , where there are no stated rules but depositors have assurances implied by governments’ action either through precedence or stated intention. Then there is explicit deposit protection, where the terms and conditions of the scheme are explicitly stated in a statute. The scheme provides a legally enforceable guarantee on all, or a portion of the principal, and in some cases the interest, on a deposit. Under an explicit scheme, the statute states categorically the types of deposits that are covered in the event of bank failures. Table 1 shows countries with explicit and implicit deposit insurance schemes. It should be noted that some countries continuously modify their schemes in response to developments in their financial system.

The types of institutions covered are also influenced by the objectives of the scheme. Where the objective is to protect the entire banking system, as is the case with Jamaica, the legislation requires that all banks be covered. Where the aim is broad, most types of deposits are covered. Table 2 shows the main features (date established, whether the scheme is voluntary or compulsory, types of deposits covered, coverage limit, funding and premium base) of explicit deposit protection schemes in a number of countries.

• References: 1) Deposit Protection Arrangements; Alexander Kyei; IMF, November 1995.
• 2) Comparative Analysis of Established Deposit Insurance Systems;
• Gillian Garcia; IMF, September 1998.

Table 2: Comparison of Selected Explicit Deposit Insurance Schemes
Coverage and Funding

• References: 1. Deposit Protection Arrangements; Alexander Kyei; IMF, November 1995.
• 2. Comparative Analysis of Established Deposit Insurance Systems; Gillian Garcia;
• IMF, September 1998.
• Notes : © indicates countries with compulsory deposit protection scheme.
• (V) Countries with voluntary deposit protection schemes
• (1) Japan will provide full coverage as an emergency measure until March 31, 2001.
• (2) Two US banks are insured by the FDIC, but the domestic bank is not covered.
• (3) The deposit protection law in Taiwan is currently under revision to make the scheme compulsory.
• (4) If the Greek system has insufficient funds, members may be called upon to pay no more than 300 percent of the
• previous years contribution in anticipation of future premiums.
• (5) Kuwait has no system of deposit insurance, but the government guarantees all deposits.