Deposit Insurance Fundamentals and Global Perspectives

Deposit insurance is a type of financial protection that safeguards depositors' funds in case their bank fails.

The Deposit Insurance Fundamentals and Global Perspectives section explains that deposit insurance is a regulatory requirement in many countries.

Deposit insurance typically covers deposits up to a certain amount, such as $250,000 in the United States.

This coverage is usually provided by a government agency or a specialized fund, which is funded by premiums paid by banks.

The main goal of deposit insurance is to maintain public confidence in the banking system and prevent bank runs.

Individual accounts are treated as one account for deposit insurance purposes, with funds added together and insured up to the Single Deposit Insurance Amount (SMDIA) in the aggregate.

Funds owned by a sole proprietorship are treated as the individual account(s) of the person who is the sole proprietor, added to any other individual accounts of that person, and insured up to the SMDIA in the aggregate.

Community property funds deposited into one or more deposit accounts in the name of one member of a husband-wife community are treated as the individual account(s) of the named member, added to any other individual accounts of that person, and insured up to the SMDIA in the aggregate.

Accounts of a decedent and accounts held by executors or administrators of a decedent's estate are added together and insured up to the SMDIA in the aggregate, provided that the deposit insurance provided by this rule is separate from any insurance coverage provided for the individual deposit accounts of the executor, administrator, other personal representative or the beneficiaries of the estate.

Single ownership accounts are treated as individual accounts, and funds deposited in them are insured up to the SMDIA in the aggregate.

If more than one person has the right to withdraw funds from an account, it's considered a joint ownership account, unless the account records clearly indicate that the funds are owned by one individual.

Funds owned by a sole proprietorship are treated as the individual account of the person who is the sole proprietor and are insured up to the SMDIA in the aggregate.

Community property funds deposited into a single-name account are treated as the individual account of the named member and are insured up to the SMDIA in the aggregate.

Accounts held in the name of a decedent or their executor are added together and insured up to the SMDIA in the aggregate, separate from any insurance coverage provided for the individual deposit accounts of the executor or beneficiaries.

Funds owned by a principal or principals and deposited into an account in the name of an agent, custodian, or nominee are insured to the same extent as if deposited in the principal's name.

Agency or nominee accounts can be held by an insured depository institution acting as a trustee of an irrevocable trust, and the insurance coverage is governed by a separate provision.

Funds held by a guardian, custodian, or conservator for a minor or ward are treated as agency or nominee accounts and are insured accordingly.

Accounts held by a guardian, custodian, or conservator are deemed to be agency or nominee accounts, just like accounts held by an agent or nominee.

Funds held by an agent, nominee, guardian, custodian, conservator, or loan servicer on behalf of two or more persons jointly are treated as a joint ownership account and are insured in accordance with separate provisions.

Joint ownership is a type of shared possession where two or more individuals have equal rights and responsibilities over a property or asset. This arrangement can be beneficial for couples, business partners, or family members who want to co-own a property.

In joint ownership, each co-owner has a proportionate share of the asset, which can be divided equally or according to a predetermined ratio. For example, if two friends co-own a car, they might split the ownership 50/50.

Joint ownership can be created through a joint tenancy or a tenancy in common. A joint tenancy is a type of joint ownership where the co-owners have an undivided interest in the property, and upon the death of one co-owner, the remaining co-owners automatically inherit the deceased person's share. A tenancy in common, on the other hand, allows co-owners to have different percentages of ownership.

Trust is built on the foundation of clear communication and mutual understanding. This is especially true in co-ownership situations, where multiple parties have a stake in the property.

In a shared ownership scenario, it's essential to establish a clear system for decision-making and communication. This can be achieved through regular meetings and open discussions, as seen in the example of the joint ownership of a family home.

Trust is also closely tied to the concept of control, which can be a major issue in shared ownership. For instance, in the case of a business partnership, one partner may have more control over the decision-making process, which can erode trust if not managed properly.

Ultimately, trust is a delicate balance that requires effort and commitment from all parties involved. By establishing clear expectations and communication channels, co-owners can build a strong foundation of trust that will serve them well in the long run.

A sole proprietorship is a business owned and operated by one individual, with complete control over the business.

Sole proprietors are personally responsible for the business's debts and liabilities.

Sole proprietorships are often the simplest and most common type of business entity, requiring minimal setup and paperwork.

They can be established quickly, usually within a day or two.

Sole proprietors can make all the decisions, but they also bear all the risks.

This type of business entity is often used for small businesses or side hustles.

A partnership is a business owned and operated by two or more individuals, with shared control and responsibility.

Partners share the profits and losses of the business, as well as the decision-making responsibilities.

Partnerships can be general or limited, with general partnerships having unlimited personal liability.

Limited partnerships, on the other hand, have limited liability, protecting the partners' personal assets.

A corporation is a separate business entity from its owners, with its own rights and responsibilities.

Corporations are often used for large businesses or those seeking to raise capital through stock sales.

They provide limited liability protection for shareholders, but also come with more complex setup and reporting requirements.

In many countries, deposit insurance is a crucial component of the financial system.

Deposit insurance schemes have been implemented in over 100 countries worldwide, with the first one being established in the United States in 1933.

The European Union has a mandatory deposit insurance scheme, known as the Deposit Guarantee Scheme (DGS), which ensures that deposits are protected up to €100,000.

In Australia, the Australian Prudential Regulation Authority (APRA) requires banks to maintain a deposit insurance fund to protect depositors in the event of a bank failure.

The European Union has a robust deposit insurance system in place to protect its citizens' savings. The EU's Directive 94/19/EC requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euros per person.

The minimum amount was increased to 50,000 euros in 2008, following Ireland's move to increase its deposit insurance to an unlimited amount. This was a response to the financial crisis and aimed to prevent a mass exodus of savings from Irish banks.

The EU's deposit insurance schemes are generally restricted to retail consumers, such as private individuals, and do not cover big wholesale customers. This is because the latter are often in a better position to assess financial risks and reduce their risk by using multiple financial institutions.

In some EU countries, like the United Kingdom, deposits are protected by the Financial Services Compensation Scheme, which covers losses of up to £85,000 per account or up to £170,000 for joint accounts. The scheme is funded through a levy paid by financial services companies that are members of the Financial Conduct Authority and the Prudential Regulation Authority.

In Switzerland, a privately operated deposit insurance system called Deposit Protection of Swiss Banks and Securities Dealers guarantees up to CHF 100,000 per bank customer per bank. Membership is compulsory for all banks and securities dealers regulated by the Swiss Financial Market Supervisory Authority.

In Mexico, the Instituto para la Protección al Ahorro Bancario (IPAB) is the deposit insurance set up by the country for account holders.

It insures up to 400,000 UDIs, the equivalent of $2,743,209.20 pesos for each account, as of July 2021.

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.

This fund is a crucial safety net for Mexican account holders, giving them peace of mind when it comes to their bank deposits.

In Norway, deposit insurance is handled by the Norwegian Banks' Guarantee Fund, also known as Bankenes sikringsfond.

Deposits in Norway are protected up to a significant amount, 2 million NOK.

Russia has a deposit insurance system that was established in 2004, after enacting a deposit insurance law in December 2003.

The system is managed jointly by the Central Bank of Russia and the government, and it's mandatory for any bank operating with private investors' money to be a member.

Maximum compensation for individuals' deposits is limited to 1,400,000 roubles, which is equivalent to approximately 21,800 US dollars or 19,500 Euro at the September 2016 exchange rate.

As of January 2008, the DIA funds exceeded 68 billion roubles, which is equivalent to 2.8 billion US dollars.

There were 15 "insured events" in 2007, resulting in payouts reaching 350 million roubles.

The Central Bank of Russia used the admission of banks into the DIA system to weed out unsound banks and money launderers, but this effort was met with resistance from those involved in illicit activities.

In Ukraine, the deposit guarantee system is governed by a specific law. The Law of Ukraine "On Households Deposit Guarantee System" was enacted on 23 February 2012, with reference number 4452-VI.

Deposits in Ukraine are protected up to a certain amount. The system covers deposits up to ₴200,000, which is equivalent to approximately US$7,550 or €6,660 at September 2016 exchange rates.

In Indonesia, deposit insurance is provided by the Indonesia Deposit Insurance Corporation (IDIC). IDIC is a legal independent institution established based on the Law No. 24 of 2004, effective since 22 September 2005.

The deposit insurance program in Indonesia is a significant change from the blanket guarantee that was in place after the Asian Financial Crisis. This change was made to prevent moral hazard.

The maximum amount of deposit insured in Indonesia is IDR 2,000,000,000 per depositor per bank.

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to provide deposit insurance to banks. President Franklin D. Roosevelt signed the 1933 Banking Act into law, creating the FDIC and giving it authority to provide deposit insurance to banks.

The initial insurance limit was set at $2,500, which was later increased to $5,000. The Banking Act of 1935 made the FDIC a permanent agency of the government and provided permanent deposit insurance at the $5,000 level.

Over time, the insurance limit has increased to keep pace with inflation. Here are the key milestones in the increase of the insurance limit:

The FDIC-insured institutions are permitted to display a sign stating the terms of its insurance, which is a symbol of confidence for depositors.

The Federal Deposit Insurance Corporation (FDIC) has a clear definition of what constitutes a deposit. A deposit is defined as having the same meaning as provided under section 3(l) of the Act (12 U.S.C. 1813(l)).

To be eligible for deposit insurance, a deposit must be made with an insured depository institution. An insured depository institution is any depository institution whose deposits are insured pursuant to the Act, including a foreign bank having an insured branch.

The FDIC also has a specific definition of what is considered an insured deposit. An insured deposit has the same meaning as that provided under section 3(m)(1) of the Act (12 U.S.C. 1813(m)(1)) and this part.

The FDIC has a standard maximum deposit insurance amount, referred to as the SMDIA, which is $250,000 adjusted pursuant to subparagraph (F) of section 11(a)(1) of the FDI Act (12 U.S.C. 1821(a)(1)(F)). This means that deposits exceeding this amount are not insured.

Deposits held in trust funds, which are funds held by an insured depository institution as trustee pursuant to any irrevocable trust established pursuant to any statute or written trust agreement, are also subject to specific rules.

The United States has a robust system in place to protect depositors. The Federal Deposit Insurance Corporation (FDIC) is the deposit insurer for the country.

Prior to the 1933 banking crisis, there were various sub-national deposit insurance schemes in the US. The FDIC was established in its wake.

Most credit unions in the US are insured by the National Credit Union Administration (NCUA). This provides an additional layer of protection for depositors.

The FDIC and NCUA each insure up to $250,000 for each owner at an institution. This means that depositors have a high level of protection against losses.

The Securities Investor Protection Corporation provides limited asset protection for the cash and securities of customers of failed investment brokerages. However, this is not insurance, but rather a safeguard against losses.

In Massachusetts, the Depositors Insurance Fund (DIF) insures deposits in excess of the FDIC limits at state-chartered savings banks. This provides an additional layer of protection for depositors in these institutions.

The Panics of 1893 and 1907 were a wake-up call for the US banking system, with many banks filing bankruptcy due to bank runs. The failure of one bank could spread to others, causing a panic.

In 1893, William Jennings Bryan proposed a national deposit insurance fund, but it didn't pass. Eight states did establish deposit insurance funds after 1907, but it wasn't enough to prevent widespread bank failures.

From 1921 to 1929, about 5,700 bank failures occurred, mostly in rural areas. The lax regulation of banks and inability of banks to branch contributed to this problem.

In 1933, nearly 10,000 bank failures occurred, or more than one-third of all US banks. A panic in February 1933 was so severe that most state governments ordered the closure of all banks.

In 1933, the United States government established the Federal Deposit Insurance Corporation (FDIC) to insure deposits and provide stability to the banking system.

The FDIC was created in response to the 1933 banking crisis that accompanied the Great Depression, making the US the second country to institute national deposit insurance after Czechoslovakia.

President Franklin D. Roosevelt signed the 1933 Banking Act into law on June 16, 1933, creating the FDIC. He was initially hesitant about insuring bank deposits, but public support was overwhelmingly in favor.

The FDIC's initial plan was to insure deposits up to $2,500, but this was later increased to $5,000 in 1933. This limit was maintained at the $5,000 level until it was eventually increased.

The 1933 Banking Act gave the FDIC authority to provide deposit insurance to banks, regulate and supervise state non-member banks, and funded the FDIC with loans in the form of stock contributions from the Treasury and the Federal Reserve Banks.

Here are some key provisions of the 1933 Banking Act:

The Banking Act of 1935 made the FDIC a permanent agency of the government, providing permanent deposit insurance maintained at the $5,000 level.

The per-depositor insurance limit has increased over time to accommodate inflation.

In 1934, the limit was a relatively modest $2,500. In 1935, it doubled to $5,000.

Here's a breakdown of the increases:

The temporary increase to $250,000 was effective from October 3, 2008, through December 31, 2010, and was later extended through December 31, 2013.

The 1980s Banking Crisis was a major test of the US financial system, and it's a lesson in how not to manage risk.

The Federal Savings and Loan Insurance Corporation (FSLIC) was created to insure deposits held by savings and loan institutions, but it didn't have enough reserves to pay off all the depositors of failing thrifts.

In 1989, FSLIC was abolished and replaced by the Resolution Trust Corporation (RTC), which was tasked with resolving the failed thrifts.

The FSLIC's insolvency led to a massive bailout, with estimated losses totaling $152.9 billion.

A significant portion of this cost, $123.8 billion, was borne by US taxpayers.

The FDIC's Bank Insurance Fund was also depleted during this time, prompting Congress to give it authority to borrow $15 billion from the Federal Financing Bank (FFB) to strengthen the fund.

The FDIC repaid this debt by 1993, showing that even in crisis, responsible management can make a big difference.

The 2007-2008 financial crisis was a pivotal moment in the FDIC's history, with 528 member institutions failing between 2008 and 2017. The annual number of failures peaked at 157 in 2010.

The crisis saw the largest failure to date, Washington Mutual, and the sixth largest, IndyMac. Wachovia, another large bank, avoided failure through last-minute merger arrangements at the FDIC's insistence.

At the height of the crisis, Treasury secretary Henry Paulson and Federal Reserve officials Ben Bernanke and Timothy Geithner proposed that the FDIC guarantee debts across the US financial sector. Chairman Sheila Bair resisted this proposal.

The FDIC instead announced a Temporary Liquidity Guarantee Program that guaranteed deposits and unsecured debt instruments used for day-to-day payments. To promote depositor confidence, Congress temporarily raised the insurance limit to $250,000.

The FDIC's insurance fund was exhausted by late 2009, with the largest payout that year being $5.6 billion for the failure of BankUnited FSB. The FDIC operated the fund with a negative net balance for a time.

The Dodd-Frank Act of 2010 created new authorities for the FDIC to address risks associated with systemically important financial institutions. These institutions were required to submit resolution plans, or "living wills", which the FDIC would execute in the event of their failure.

The act also made the insurance limit increase permanent and required the FDIC to submit a restoration plan whenever the insurance fund balance falls below 1.35% of insured deposits.

In 2014, the FDIC issued guidance for the 2015 resolution plans of CIDIs of large bank holding companies (BHCs).

The guidance provided clarity on the assumptions that are to be made in the CIDI resolution plans, including the assumption that the CIDI must fail and that the cause of CIDI failure must be a core business loss or impairment.

A key requirement of the 2015 CIDI resolution plans is the inclusion of at least one "multiple acquirer strategy".

In the event of a CIDI failure, a deep level of granularity is expected in the plan, including sales strategies that must be feasible and supported by considerable acquirer detail.

A detailed financial and liquidity analysis is also needed to demonstrate the CIDI's insolvency at the start of resolution.

Key legal issues must be considered in the plan, including resolution obstacles that must be addressed.

The FDIC requires that CIDI resolution plans be submitted by institutions with assets of $50 billion or more, in addition to the Bank Holding Company ("BHC") resolution plans required under the Dodd Frank Act.

Here is a summary of the requirements for the 2015 CIDI resolution plans:

The FDIC receives no funding from the federal budget, instead assessing premiums on each member to accumulate in the Deposit Insurance Fund (DIF). This fund is used to pay operating costs and the depositors of failed banks.

The amount of each bank's premiums is based on its balance of insured deposits and the degree of risk it poses to the FDIC. The FDIC has expended its entire insurance fund twice, during the savings and loan crisis and the 2007-2008 financial crisis.

In 2020, the amount of insured deposits was approximately $8.9 trillion, requiring the fund to be at least $120 billion. The FDIC is fully invested in Treasury securities, earning interest that supplements the premiums.

Between 1989 and 2006, there were two separate FDIC reserve funds: the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The existence of two separate funds led to banks shifting business between them, driving up premiums.

The FDIC merged the BIF and SAIF into a single fund in 2006, following criticism from then-Chair of the Federal Reserve Alan Greenspan. As of December 31, 2022, the balance of the FDIC's Deposit Insurance Fund is $128.2 billion.

The FDIC has been considering changes to deposit insurance, and in May 2023, they offered three options for reform.

One option is to maintain the current framework but raise the limit from the current $250,000 per account. This would provide more protection for depositors, but it's unclear if it would be the most cost-effective solution.

The FDIC has also proposed extending unlimited deposit insurance to all depositors. This option would provide the most protection, but it would also come with a higher cost.

The FDIC's preferred option, called "targeted coverage", would offer different deposit ceilings for different types of accounts. This would provide higher ceilings for business payment accounts, which are often used for payroll and other purposes.

Here are the three options in more detail:

A bank can offer premiums to depositors, but these must meet certain conditions to avoid being considered interest. The premium must be given only at the time of opening a new account or adding to an existing one.

To qualify, the premium can be in the form of merchandise, credit, or cash, and the bank must retain records to prove compliance with the rules. The value of the premium must not exceed $10 for deposits under $5,000 or $20 for larger deposits.

Premiums are only allowed if no more than two are given within a 12-month period, and the bank cannot solicit funds by promising to split them into multiple accounts to avoid this limit.

Coverage is a crucial aspect of FDIC deposit insurance. Your deposits are insured up to $250,000 per depositor, per insured bank.

FDIC deposit insurance covers a range of deposit accounts, including checking accounts, savings accounts, and time deposits. This means that your everyday banking needs are protected.

Some examples of covered deposit accounts include checking accounts with a hold option, savings accounts with check-writing restrictions, and certificates of deposit (CDs). These accounts are all insured separately, so you can bank with confidence.

All branches of a bank are considered to form a single bank, so your deposits at different branches are all insured together. This means that you don't need to worry about keeping your deposits in separate accounts at different branches.

Here are some examples of covered deposit accounts:

Non-US citizens are also covered by FDIC insurance, as long as their deposits are in a domestic office of an FDIC-insured bank.

Premiums are a way for banks to offer incentives to depositors, but there are rules in place to ensure they're not being used to circumvent interest rate limits.

The value of a premium can't exceed $10 for deposits under $5,000 or $20 for deposits of $5,000 or more.

Banks can give a maximum of two premiums per deposit within a 12-month interval.

The costs of premiums can't be averaged, and banks must keep records to prove compliance.

A bank can't solicit funds under the guise of paying multiple premiums within a 12-month interval.

Any premium not related to the balance in a demand deposit account is exempt from these rules.

The FDIC is part of a larger network of government agencies and programs that work together to protect depositors. The FDIC is an independent agency of the US government.

The FDIC is not alone in its mission to protect depositors. In Canada, there's the Canada Deposit Insurance Corporation, which serves as the FDIC's counterpart. The FDIC also has international counterparts, such as the Financial Services Compensation Scheme in the United Kingdom.

Here are some key government agencies and programs related to the FDIC:

The authority behind government decisions is rooted in specific laws and regulations. 12 U.S.C. 1813(l) and 1813(m) are two such laws that provide the foundation for certain government actions.

These laws are often referred to in conjunction with other regulations, such as 1817(i), which further outlines the scope of authority. The Federal Register, a government publication, is where you can find these laws and regulations in action.

On May 11, 1998, the Federal Register published a significant amendment to these laws, which can be found in [63 FR 25756]. This amendment has been updated over the years, with another update occurring on April 1, 1999, as seen in [64 FR 15656].

The authority granted through these laws is not static and has been subject to change. For example, a significant update occurred on September 13, 2013, as documented in [78 FR 56589].

Employee benefit plans are a crucial aspect of government and agencies' employee packages. They vary widely depending on the organization and its size.

Health insurance is a common benefit offered by many government agencies. This can include medical, dental, and vision coverage for employees and their families.

Life insurance is often provided by government agencies as a form of financial protection for employees. This can be in the form of a basic life insurance policy or a supplemental policy.

Retirement plans are also a standard benefit offered by government agencies. These plans can include traditional pension plans, 401(k) or 403(b) plans, or a combination of both.

Paid time off (PTO) is another benefit that government agencies often provide. This can include vacation days, sick leave, and holidays.

The government plays a crucial role in shaping the policies and regulations that affect our daily lives. It's responsible for creating and enforcing laws, collecting taxes, and providing essential public services.

The federal government is divided into three branches: the legislative, executive, and judicial. The legislative branch is responsible for making laws, the executive branch enforces them, and the judicial branch interprets them.

A good example of this is the system of checks and balances, which ensures that no one branch has too much power. This is designed to prevent any one branch from abusing its authority.

The government also has various agencies that work under its umbrella to carry out specific tasks. For instance, the Federal Reserve is responsible for regulating the banking system and maintaining the stability of the financial market.

Some of these agencies, like the Environmental Protection Agency (EPA), focus on protecting the environment and public health. They set standards and regulations to ensure that companies and individuals comply with environmental laws.

The government's role in providing public services is another important aspect. This includes infrastructure development, such as roads and bridges, as well as social services like education and healthcare.

In the United States, the government is responsible for funding public education through programs like Title I, which provides financial assistance to schools serving low-income students.

The Federal Deposit Insurance Corporation (FDIC) is not the only agency working to ensure the stability of the US banking system. The FDIC has counterparts in other countries, including the Canada Deposit Insurance Corporation, which is the Canadian equivalent.

These agencies work together to provide deposit insurance, protecting consumers' deposits in case of bank failures. The Depositors Insurance Fund, for example, was the inspiration behind the formation of the FDIC.

In the US, the FDIC is joined by other agencies that play a crucial role in regulating the banking industry. The National Credit Union Share Insurance Fund, for instance, is the counterpart to the FDIC, providing similar protection for credit unions.

Here's a list of some of the related agencies and programs:

These agencies work together to maintain a stable banking system, protecting consumers and promoting economic growth. The FDIC, for example, has been in operation since 1933, when it was established by the US Congress.

Deposit insurance has its critics, and one of the main concerns is the introduction of a moral hazard issue. This means that banks can take excessive risks because depositors don't fear for their deposits' safety.

Detractors argue that without deposit insurance, banks would compete prudently for deposits, as depositors would prefer safe banks over risky ones to protect their money.

The Bibby plan is an alternative approach that avoids the problem of moral hazard while still preventing bank runs. It would have the state provide deposit insurance, with banks paying regular premiums to the state reflecting the extent of the deposit insurance.

The level of deposit insurance could be chosen by the banks, taking into account their inherent risk. This would allow for some differentiation between banks in terms of investment risk and the level of insurance offered.

If deposit insurance is provided by another business or corporation, there's a presumption that they would either charge higher rates or refuse to cover banks that engaged in extremely risky behavior. This would solve the problem of moral hazard and reduce the risk of a bank run.