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 Because they rely on customer deposits that can be withdrawn on little or no notice, banks in financial trouble are prone to bank runs, where depositors seek to withdraw funds quickly ahead of a possible bank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