Deposit insurance is a system that guarantees that depositors will not lose money even if their bank goes bankrupt. Deposits maintained in separate insured depository institutions or in separate branches of the same insured depository institution.
- Deposits maintained by foreigners and deposits denominated in foreign currency.
- Deposits in insured branches of foreign banks.
- International banking facility deposits.
IN AESOP'S fable about the hare and the tortoise, the tortoise accepted the hare's challenge to a race. The hare was much faster than the tortoise, but, after sprinting ahead in the opening stretch, he lay down to take a nap, confident of his ability to outrun his opponent. When he awoke, the tortoise, who had plodded on slowly but steadily, was nearing the finish. The hare could not catch up, and the tortoise won the race.
A successful deposit insurance system is more like the tortoise than the hare. On the surface, it appears that a national deposit insurance system can be set up quickly and easily, by announcing a public guarantee of bank deposits. Some countries, hoping to prevent wholesale deposit withdrawals that could cause healthy banks to fail and to bring stability to a troubled banking system, have tried to create a deposit insurance system in just this way. Unfortunately, unless the system has both sufficient financing to ensure it will survive a serious financial crisis and a strong program of bank supervision, it is destined to fail.
Benefits to Insurers :
- Deposit insurance is not insurance of deposits per se but insurance against instability in the system consequent upon the failure of one or more banks.
- Insurance of bank deposits is intended to give a measure of protection to depositors, particularly the smaller depositors, from the risk of loss of their savings arising from bank failures. Such protection infuses confidence in the minds of the public and contributes to the growth of the banking system by assisting in development of banking habits and mobilization of resources by the bank. These resources in turn can be utilized for purposes which are accorded national priority.
